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What are the implications of these giants on our foreign policy? There are recent examples of strange activities by corporations operating in foreign countries. How did corporate interests influence our Government's policy toward Allende in Chile? To what extent did ITT aid the overthrow of the legally elected Chilean Government ?
How do we prevent corporations from making foreign payments to Italian politicians or trying to buy reductions in export fees by bribing foreign government officials? I read in a recent issue of Newsweek the comments of Edwin Reischauer on Lockheed's payment to a Japanese in order to get contracts with Japan. He said, "... the damage has been astronomical, ... the stupidities committed have been almost beyond belief. In a country not given to official bribery, in competition with American, not foreign companies, Lockheed officials allegedly paid exorbitant bribes through a somewhat disreputable rightwing extremist whose involvement in any cause is likely to do it more harm than good. Can men actually be paid salaries for making such absurd decisions ?”
I am especially concerned with the ability of consumers and small businessmen in today's market to effectively deal with giant national and multinational corporations. How has the increase in size affected those who buy and sell from the giant corporations ? Not only the individual consumers but the small businessman and local and State governments. The problem is the ability of the giant companies to disregard the rights of smaller companies. Big companies can control through their buying power entire industries, and can use their deep pockets to litigate a small businessman into bankruptcy.
Finally, I wonder about the influence of these corporations on State and local governments. We don't allow the welterweight champion in the ring with heavyweight champs, but many communities find themselves up against corporate giants. How does the local tax assessor see to it that the corporation pays its share of taxes? If he fairly assesses corporate property and then finds himself in an adversary fight with a seasoned lawyer skilled in the arts of advocacy, he will probably settle for whatever assessment the corporation suggests.
The federal response to these problems has been to look at one industry and one problem at a time. When the problems became acute, the Federal Government created a bureaucracy to deal with it. It has occurred to me that the creation of a modern self-enforcing type of Federal charter might contribute significantly in the congressional efforts to reduce the massive Federal bureaucracies that have grown around these problems and industries.
The first corporation giants, the railroads, were responsible for the establishment of the first regulatory commission, the Interstate Commerce Commission (ICC). The creation of the Securities and Exchange Commission (SEC) represent the most direct Federal involvement in corporation law. It was created when the capital market of this country was crumbling in order to restore investors' confidence in the stock market, and brought information to the investor. The Civil Aeronautics Board (CAB) exists because of the giant airlines and the Federal Communications Commission (FCC) in large part because of Ma Bell.
Most recently the Federal Government has been addressing the issues created by the corporate giants on a problem-by-problem basis.
We now have the Environmental Protection Agency (EPA) to repair the damage already done to the environment, and hopefully to prevent damage in the future. We have the Consumer Product Safety Commission to assure that dangerous or defective products are not marketed.
What options do we have? Is it possible to save billions of taxpayer dollars by using the corporate charters to handle the problems we have been solving through giant Federal bureaucracies. Why not consolidate the hundreds of Federal laws and regulations into concise constitutional principles in a single document, which also contains the reinedies for violations of those laws or requirements.
If we can come up with a chartering principle that will simplify and streamline the Federal involvement in some of these areas of concern, would not that also facilitate returning to the State and local governments responsibilities that they are in fact most suited to handle? I feel strongly that the smallest unit of Government capable of doing the job efficiently should be the highest unit of government to have the responsibility. Is it true that the States can handle the chartering job efficiently? If not, would transfering that role to the Federal Government not in fact reduce the overall Federal involvement!
There is little doubt of the need to move the relationship of the Federal Government and giant corporations toward the 21st century, to build bridges between the highly technical global industry and the lives of ordinary people. In doing this, we want to hear all points of view. Not only those of the experts we are to hear today and in subsequent days of hearings, but in the future the experiences of those most directly affected by these giants.
I approach these hearings mindful of the problems we have experienced in the past, but with no preconceived notions as to how to solve them. I am willing to consider that ultimately there is no role for the Federal Government in this area other than what it is today, On the other hand, I believe that the giant corporations have, in large measure, been responsible to the creation of the Federal regulators. We shall look for more effective ways to do the job and at the same time reduce the size of the bureaucracy.
I think it is going to be a tight schedule today. We are going to have several votes, so I think we will have to move along as rapidly as possible.
At the outset I want to stress my appreciation for the witnesses coming. I know Mr. Hessen has been here I understand since Thursday, experiencing the air quality in the Washington area, and I thank you for your patience.
I hope we have not irreparably damaged your health.
Senator DURKIN. At the present time, Senator Hartke has asked me to read a letter. He is unable to attend the hearings today.
DEAR SENATOR DURKIN: I regret that I will be unable to attend the hearings on corporate rights and responsibilities Tuesday, June 15. The need for an extensive investigation of the relationship between the Government and the corporation is obvious and long overdue. As you know, I am deeply committed to the pursuit of this question, and I am very pleased that while we were unable to commence the hearings as planned last week, that you were able to find time to inaugurate this investigation.
I will be looking forward to working with you closely throughout these hear. ings and on the development of any legislation that may be necessary to better define the Government/corporate relationship. Sincerely,
U.S. Senator. Senator DURKIN. Also a statement from Senator Inouye for the record.
[The statement follows:]
STATEMENT OF HON. DANIEL K, INOUYE, U.S. SENATOR FROM HAWAII I regret deeply that I am unable to appear this morning on this first day of the hearings on the social and economic rights and duties of corporations. A previous commitment has prevented my attendance at this important event. However, I look forward to participating actively in future hearings.
Chairman Magnuson and Senator Hartke are to be congratulated for taking the lead in scheduling hearings on this subject. Very little recent study has been given by the Federal Government to the impact of corporations on American society or to corporate rights and responsibilities. These hearings are therefore timely and extremely important, for they will contribute to our understanding of the modern corporation and its relationship to the economy and to the general public's well-being.
In no other area has the corporation developed and evolved more rapidly than in foreign direct investment. In the short space of three decades, the multinational enterprise has literally changed the face of this planet, affecting virtually every inhabitant by developing new products and markets, transforming financing methods and capital movements, bringing the world together through communications, diffusing technology, and exploiting natural resources more extensively and intensely than ever before. The world today would be unimaginable without the modern multinationals. No one knows this better than Senator Hartke who, to his credit, was one of the first in the Senate to address himself to this issue.
The leaders in the development of modern multinational enterprise have been American corporations, and their global impact has been immense. At year-end 1974, the last year for which official figures are available, the U.S. direct investment position abroad was an estimated $119 billion, a sum which probably underestimates the accurate position because of deficiencies in our data collecting programs.
Sales by majority-owned foreign affiliates of U.S. companies amounted to $438 billion in 1974, or more than four times American exports and almost three times their sales total only 4 years earlier. Investment in overseas affiliates has increased far more rapidly than domestic investment, particularly in the crucial manufacturing area. Job creation by overseas affiliates has also expanded much more rapidly than by domestic enterprises.
International investment is a two-way street, however, and recently we have witnessed a major growth of foreign direct investment in the United States. A new benchmark study just completed shows that such investment was $26.5 billion at year-end 1974 and has been accelerating. Sales in 1974 of these foreignowned affiliates was $147 billion. These foreign multinational corporations employed more than 1 million Americans. They plan a crucial role in our international trade, dominating certain major segments of it.
The American role in the evolution and growth of the multinational firm has been steadily diminishing even as the pace of international direct investment has increased. Foreign multinationals are now almost as numerous as American companies and have proved to be aggressive competitors.
Statistics can only begin to suggest the enormous importance of the multinational enterprise in the global economy. Economic power also means political and social power. In some cases multinational firms have boldly and illicitly engaged in actions contrary to the interests of the host country. Companies, with their vast resources and expertise, can consciously or unconsciously thwart the
policies and objectives of many of their host and home countries. Even simple activities such as pricing might have a deleterious effect on a country's economy and lead to political tensions and to exacerbated relations.
Although there are those who claim that the corporation is simply a mechanism for commercial organization, this view clearly is unrealistic. The influence possessed by the multinational firm far exceeds the economic sphere. We need a new conceptual framework to measure its impact, to assist us in devising appropriately responsive policies, to mitigate its excesses, and to utilize it properly for our mutual benefit.
Just as it would be wrong to ignore the vast economic and political power of the multinational firm, it would be equally foolhardy to view it through a narrow ideological focus and to burden it in such a way which would undermine its capacity to function. In spite of the burgeoning literature on this subject, we need to learn much more about the impact of international direct investment on the world economy. The choice of the multinational enterprise as a convenient target sometimes obscures the ineptness and errors of a government. Acting on dog. matic assumptions and erroneous information, we run the risk of weakening our national interest and surrendering those benefits multinational enterprises create.
It is my hope that we have passed that phase in the multinational debate when issues were seen as either black or white. No longer do developing nations demand the dismantling of multinational companies. Instead they, and even the socialist non-market countries, are asking how the multinational enterprise's advantages can be maximized—not how they can be eradicated.
Even though the corporation—both global and domestic—is an institution with enormous economic, political, and social influence, we must avoid the temptation of imposing so many constraints on it so as to prevent it from working properly. The corporation is first and foremost an economic institution, and we must strike a fine balance between this fact and society's right to be protected from potential corporate excesses and its unplanned side effects. Too often it is the failure of government, as the elected arm of the people, to meet its responsibilities and duties which permits the corporation to operate in a manner inimicable to the public weal.
Again, I wish to congratulate the Chairman and Senator Hartke for their foresight and to reiterate my intention to participate fully in the future.
Senator DURKIN. I would like to state there has been some mention in the press that I endorsed the proposal of Ralph Nader for a Federal corporate charter.
I have neither endorsed it nor frowned on it.
That is one of the reasons I am here this morning. I think that is one of the reasons we are all here, to investigate the role between the corporation and the Government.
I think it is a question that must be explored, but it isn't a case of voting or king a decision and then having the debate later on.
But I also want to make sure that in no way do my remarks indicate that I am repudiating the proposal.
We are here to find out what is the relationship and where should we go from here if anywhere.
So, without further comments from me, I would like to call Mr. Robert Hessen.
STATEMENT OF ROBERT HESSEN, GRADUATE SCHOOL OF BUSINESS
AND HOOVER INSTITUTION, STANFORD UNIVERSITY, STANFORD, CALIF.
Mr. HESSEN. Thank you, Mr. Chairman.
My name is Robert Hessen. I am a research fellow at the Hoover Institution on War, Revolution and Peace at Stanford University, where I also teach in the graduate school of business.
I am here today to present for your consideration my views on why the proposal for Federal chartering of corporations should be rejected and why the present system of State incorporation laws should be maintained.
The proponents of Federal chartering claim that all corporations are creatures of the State,” dependent upon Government for special privileges; that State incorporation laws wrongfully favor corporate officers at the expense of shareholders; and finally that giant corporations are monopolistic and anticompetitive.
My purpose today is to challenge each of these beliefs.
Those who hold that every corporation is a creature of the State mean, first, that a corporation owes its existence to governmental permission and, second, that through its charter a corporation obtains special privileges which only Government can confer. There is no factual basis for either claim. A corporation is created by a voluntary contractual agreement be
individuals seeking to promote their own financial self-interest. The articles of incorporation-or charter-are a contract solely between the individual founders of the enterprise; the State is not a party to the contract, nor does it give life or birth to the corporation. The role of the State is simply to record the formation of every corporation--nothing more.
Those who contend that the State confers special privileges upon the corporation point to three features: limited liability; perpetual existence; and entity status. However, none of these features depends upon State-created privileges. They can all be attained by contractual agreement, as they often are in partnerships and other noncorporate forms of business.
Therefore, any attempt to justify stringent controls over corporations because they are "creations of the State," or recipients of special privileges” collapses for lack of evidence.
The advocates of Federal chartering claim that existing State incorporations laws fail to provide adequate protection for corporate shareholders, while granting unlimited discretionary authority to the officers. Therefore, they recommend that new Federal legislation impose a system of active and continuous consultation between shareholders and officers. In Ralph Nader's version of Federal chartering, he proposes a mandatory shareholder plebiscite by mail on all “fundamental transactions."
My criticism of these proposals is that their advocates have offered no evidence whatsoever that shareholders want or need a veto power over corporate transactions. The safeguard for shareholders is the stock market, which functions as a daily plebiscite, enabling shareholders to register their approval or disapproval of the policies proposed by officers.
In fact, corporate shareholders are deliberately and intentionally inactive. The purchase of corporate shares is attractive to people who are seeking a sideline investment, one which will not require their active participation in managerial decisionmaking.
Although the "separation of ownership and control" in giant corporations has often been denounced, it merely represents a widening specialization of function, or division of labor. There is no reason