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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 dogmatic 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 making 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 between 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

why a shareholder must personally manage his own wealth instead of entrusting it to managerial specialists, as investors do when they become limited or silent partners, or buy mutual funds, or deposit money in savings accounts, or purchase corporate bonds. None of these other investment opportunities carries any voting rights or voice in management.

Similarly, Mr. Chairman, there is no reason to believe that when corporations "go public" the founding officers or their successors intend to relinquish any of their managerial authority. For example, when Walt Disney, Edwin Land and Thomas J. Watson sold stock in their companies to outsiders, to strangers, they were seeking capital, not advice on how to produce cartoons, cameras or computers. New investors were never led to believe that they were acquiring managerial powers equivalent to those of general partners.

If the relationship between investors and managers is mutually acceptable if millions of people willingly invest their money in corporations which they know will not personally manage then outsiders have no right to interfere.

Ralph Nader and others want a Federal chartering law to include a stringent new test of monopoly power, one which can be used to break up the giant corporations.

Nader claims that the giants are monopolistic and anticompetitive, but he defines neither term. Instead he makes various sweeping allegations that giant corporations have become bloated, wasteful, and inefficient, that they have sunk into institutional senility because "the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone."

The only firm which truly fits this description is the U.S. Postal Service, which has a Government-protected monopoly. It surely does not fit IBM, Xerox, or most of the other giant corporations which, ironically, are attacked by smaller firms in their industries because they innovate too often and never seem willing to "let well enough alone."

If competition means a process of rivalry for sales and profits, it is a myth to claim that giant firms are immune from it. Companies within the same industry compete with each other, for example, Kodak versus Polaroid; companies in different industries compete with each other, for example, steel versus aluminum; companies keep branching out into new lines of production, for example, IBM has challenged Xerox's dominance in the field of photocopying, while Xerox has introduced an electric typewriter to compete with IBM's. As long as Government does not create legal barriers to entrylicenses, franchises, tariffs, or import quotas-the giants cannot afford to stagnate.

In Ralph Nader's proposal, 1 year after the enactment of the Federal chartering law, he would have the Antitrust Division publish a list of "relevant product markets." This list would be used retroactively to punish corporations whose share of the market exceeds the "permissible limits" by which he means one firm having more than 12 percent of a market or four firms having more than 50 percent of the market. Nader views size per se as an evil, as evidence of criminality. Observe, however, that he holds this belief as an axiom, a self-evident truth.

But my question is this: If one company holds more than 12 percent of the market, or if four companies hold more than 50 percent, whose rights have been violated? Who has been wrongly deprived of anything?

How can one justify the dismantling of companies which have supplied products of proven excellence and acceptability, and, in the name of what are we being asked to deny the rights of producers?

Mr. Chairman, in conclusion I would like to direct the committee's attention to the fact that corporations are created and sustained by freedom of association and contract, and that the source of these freedoms is individual rights. Rights are not suddenly forfeited when a business grows beyond some arbitrarily defined size, either in terms of assets, sales or profits, or the number of investors, employes... or customers.

Americans enjoy a standard of living-of luxury, leisure, and longevity-unprecedented in world history and unparalleled in contemporary socialist societies. I strongly urge you not to undermine the system which has made these achievements possible.

Thank you.

Senator DURKIN. Thank you, Mr. Hessen.

When you indicated that your view was that the role of the State is simply to record the formation of every corporation and nothing more, are you attempting to describe what goes on today in most of the States, or are you indicating what you think it should be under ideal circumstances?

Mr. HESSEN. I am attempting to describe both.

Today, State corporation laws are known as either permissive or enabling or, if you don't like them, lax. Now, the question is: Why did State corporation laws become permissive or enabling? That is, why do you simply have to file certain information with a Commissioner of Corporations in a given State?

The answer is that business firms were able to achieve corporate characteristics de facto in the 18th and early 19th centuries in both England and America. The reason why permissive statutes were enacted in the mid-century is that a partnership could become a corporation de facto; it could attain corporate features through contractual agreements. So Great Britain in 1844 passed a Companies Act which said if you file certain information you are a corporation de jure.

Well, this British Act of 1844 contradicts the Nader theory that the reason why American corporate law is so permissive or enabling is what he calls the race to the bottom-the competition between the States for corporate franchise revenues. England has no Delaware, no scapegoat upon which one can blame the permissive character of corporate law.

Parliament and the State legislatures came to the realization that corporations de facto could be formed without their authorization. So they said: if we want to exercise some kind of control over businesses, if we want to make it easier for investors, managers, directors, and creditors to know their respective rights, prerogatives, and limitations, let's give them a body of law which will facilitate the objectives they can achieve anyway by contract. In other words, let's make corporate law permissive and enabling, not restrictive.

I might point out there is a scholarly literature documenting this for America, a book by Shaw Livermore titled "Early American Land Companies," and for Great Britain a book by Armand Budington Du Bois titled "The English Business Company After the Bubble Act." Senator DURKIN. Do I take it, then, you would really favor repeal of most of the State statutes and chartering laws, corporation laws, and that you want to have a universal recording law or have the States just have a provision for recording the event.

Mr. HESSEN. NO; I would not favor any change from the existing system. For example, Delaware (which is known today as the corporate headquarters of America) has built up nearly a century of case law, attempting to interpret and delineate precisely what are the respective responsibilities and prerogatives of shareholders, directors, and corporate managers.

It would make no sense to overturn the existing system and introduce new legislation which, by virtue of being new, would mean there are no judicial decisions which delineate precisely what various provisions mean.

The reason why companies switch to Delaware is that Delaware provides them with certain advantages. First, low taxes, but that is really the least significant one. The second attraction of Delaware is that it provides judges who are highly experienced in the intricacies of corporate law and corporate finance. Therefore, unlike in other States where judges come to the bench unprepared, these men are able to get down to the intricacies of a case rather than having to learn the law for the first time.

But truly the most significant advantage of Delaware, Mr. Chairman, is that there has been such a vast body of cases and judicial decisions that there is hardly a single point which could be litigated where there isn't a body of cases already. In short, there is predictability.

Companies go to Delaware because they know precisely what the law is. When the Delaware legislature finds contradictory court decisions on the books, they periodically recodify the Delaware corporate law statutes so there is one unambiguous ruling which will prevail.

I think it is highly advantageous to shareholders to know precisely what they are getting into. In Delaware they know precisely what their rights and limitations are as shareholders. So if you wipe out certainty or predictability by enacting any form of Federal chartering, I think it will be a measure highly inimical to shareholders, to capital formation, and to corporations as such.

Senator DURKIN. That argument sounds quite familiar, similar to the argument we shouldn't change any rules and procedures in the Senate.

Mr. HESSEN. Because people are familiar with them, presumably, and they have learned to live with them and they have discounted for them.

Senator DURKIN. But there are some of us that think the hallowed traditions of the Senate are getting very, very expensive for the consumers across the country.

I hope I didn't detect in your argument that you need to have someone so familiar that they understand all the nuances and intricacies

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