sideline investment, one which will not require their active participation in managerial decision-making. Although the "separation of owernship and control" in giant corporations is frequently 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, there is no reason to assume 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, they were seeking capital, not advice on how to produce cartoons, cameras and 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 will not personally manage, then outsiders have no right to interfere.

Nader's second proposal is "full disclosure." Because he believes that all wealth rightfully belongs to the government, not to those who produce it, Nader demands that all corporate income tax returns be published and widely distributed so that "members of the public" can know "whether their (!) largest corporations are honestly paying their taxes."

Because he believes that there is no legitimate reason for privacy (which he condemns as "secrecy"), Nader proposes mandatory disclosure of the names of those who currently own stock in "street name," or through nominees. "These contrivances," he says, "are only useful to individuals or companies who wish to evade law or public knowledge . . ." He overlooks the fact that everyone has a right to confidentiality, which need not be justified to anyone else. Privacy is not a law-breaking act.

In the name of full disclosure, "no corporation shall be allowed to keep confidential information required by government . . ." In other words, he wants to give government a blank search warrant to comb through corporate records. This proposal would deny to businessmen the safeguard of the Fourth Amendment against unreasonable search and seizure. If it were aimed at muggers or murderers, civil libertarians would rally to their cause. But since it is directed against businessmen, no one has protested.

Nader's third major proposal, antitrust action to break up the giant corporations, is based on his claim that they are monopolistic and anti-competitive. He defines neither term; instead, he makes sweeping allegations that giant corporations have become bloated, wasteful and inefficient. "Unchallenged economic power deadens initiative, discourages thrift and depresses energy." 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, a government-enforced 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, e.g. Kodak vs. Polaroid; companies in different industries compete with each other, e.g. steel vs. aluminum; companies keep branching out into new lines of production, e.g. IBM has challenged Xerox's dominance in the field of photocopying, while Xerox has introduced an electric typewriter to compete with IBM's. In fact, as long as the government does not create legal barriers to entry-licenses, franchises, tariffs or import quotas-the giants cannot afford to stagnate.

Given Nader's assertion that giant corporations are completely safe from competitive challenge, what is his solution? He proposes that within one year after enactment of the federal chartering law, 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."

Three years ago, in his book Corporate Power in America, Nader said that no firm should be allowed to hold more than 12% of the market. Today he says that

antitrust actions will be started whenever "four or fewer corporations account for 50% or more of sales." What his criteria will be three years from now is anybody's guess, as is the meaning of "relevant product markets," which he never defines. As Ayn Rand observed in Capitalism: The Unknown Ideal, "There is no way to legislate competition; there are no standards by which one can define who should compete with whom, how many competitors should exist in any given field, what should be their relative strength or their so-called 'relevant markets,' what prices they should charge, what methods of competition are 'fair' or ‘unfair.' None of these can be answered, because these precisely are the questions that can be answered only by the mechanism of a free 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 if one company holds more than 12% of the market, or if four companies hold more than 50%, whose rights have been violated? Who has been wrongfully deprived of anything? Why are the rights of producers to be denied in the name of Nader's axiom? If a man described as a "consumer advocate" proposes to break up the companies which have supplied products of proven excellence and acceptability, one wonders what a "consumer enemy" would do.

In view of Nader's professed concern about protecting investors against fraud, and consumers against shoddy products, his silence is often eloquent. He has never spoken out against U.S. Savings Bonds, which the government promotes as attractive investments even though, after taxes and inflation, they usually yield a negative rate of return. If businessmen had been guilty of such a practice, Nader would accuse them of deceptive advertising.

Nor has he criticized Social Security, which, despite its soaring premiums, is flirting with bankruptcy. If businessmen had coerced people to participate in a retirement program, then had continuously raised the premiums while giving the participants no option to withdraw, Nader would denounce them for extortion and fraud. Nor has he spoken out against the U.S. Postal Service. One wonders why his demand for competition does not apply to this government-operated monopoly.

One final question deserves brief attention. Regardless of whether one agrees with Nader's viewpoint, is his report accurate and well-documented? At first glance, it seems like a work of serious scholarship, given its 63 pages of footnotes. After all, since footnotes can be verified, one assumes they must be accurate. It is hard to believe that a man of Nader's reputation would release a reportparticularly one which took five years to prepare-without scrupulously check. ing his sources and his facts. Yet this is precisely what he has done.

My suspicions were aroused by the very first words of the report, a quote from a Supreme Court decision. To misquote three times in three sentences is scarcely a way to inspire confidence. If this had turned out to be the only example of carelessness, it would not merit notice. But the report is littered with errors. Some are trivial (the result undoubtedly of careless proof-readiing); others are not. There are several missing footnotes and quotes without references, and a Federal Trade Commission report is cited in such a peculiar way that only someone experienced in the use of government documents can track it down. In many cases, footnotes refer to huge books but give no specific page references, so that citations must be accepted on faith-usually a tipoff that something is amiss. Because it is the briefest chapter, I tried to verify every footnote in Chapter III. I found that it is shot through with what scholars call "phantom footnotes." In Nader's report, they come in three varieties. First, there are notes that fail to correspond to the text. Thus, a 1917 book is given as the place to find the text of a 1964 court decision; for the text of a 1942 case, we are referred to a 1903 newspaper story.

Second, there are sources which do not contain the material which Nader claims they contain. Note 13 of Chapter III cites President William Howard Taft as favoring federal chartering (which he did prior to 1912), but when one tries to verify the citation, one finds instead Taft's opinion that the proposal for federal chartering "would create the most monstrous monopoly of power in the history of the world—a power as much greater, as much more autocratic, than that of a Caesar or a Napoleon . . ."

The third and most serious type of phony citation is one which seeks to by-pass argument by referring the reader to prestigious authorities. To the question: does Congress possess the constitutional authority to compel giant corporations to obtain federal charters? Nader offers an unequivocal answer: "There is little

doubt today that the federal government can charter business corporations." In a footnote, he elaborates: "Although once hotly disputed, there is today no serious question that a federal chartering law would be constitutional. . . ."

In support of this opinion, Nader cites two authoritative sources. But the firsta 1969 essay by Adolf A. Berle-makes no mention of the issue of constitutionality. The second reference is to a 1934 Federal Trade Commission report. Now 1934 hardly fits Nader's twice-repeated claim that "today" the constitutionality of federal chartering can hardly be denied. But anyone who manages to track down the FTC report (the one cited in such a way as to discourage its being found), will not discover an FTC opinion on the page Nader cites, but rather an excerpt from an article by H. L. Wilgus in the Michigan Law Review. Since Wilgus (1859-1935) was a reputable scholar, Nader's "authority" does not seem to be controverted except for one fact: the article was published in February 1904, not exactly "today."

Nader's report is a classic example of sciolism, a pretense at scholarship, a show of learning without substantial foundation. In Chapter III, eight of 22 footnotes are unverifiable either bogus or deceptive-an error ratio of 36%. The entire report contains 996 footnotes; if the same ratio holds up, there will be 359 phantom footnotes. Nader's report is a dangerously defective product which should be recalled by its manufacturer before it inflicts injury upon unwary

users.

If Nader's proposal for federal chartering is to be defeated, a systematic, widescale counterattack must be launched against the critics of corporations. But it must be an intellectual counter-offensive, one which not only challenges the specific policy recommendations of the critics, but also, more importantly, the philosophical premises on which they base their claims. A proper defense of corporations must emphasize that they 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.

The productive members of the American business community have no need to apologize for their achievements. They are responsible for the fact that Americans enjoy a standard of living-of luxury, leisure and longevity-unprece dented in world history and unparalleled in contemporary socialist societies. But production and prosperity depend upon freedom-and freedom cannot survive unless we speak out in its defense.

Senator DURKIN. Dr. Gordon Adams.

Dr. Adams, do you want to proceed in any manner that you find most comfortable? This is an exploratory hearing. So feel free to proceed. We do have some time constraints. We have to disband by 1 p.m.

STATEMENT OF DR. GORDON ADAMS, DIRECTOR OF MILITARY RESEARCH, COUNCIL ON ECONOMIC PRIORITIES, NEW YORK, N.Y.

Dr. ADAMS. I expect I won't be that long, Senator Durkin. I will abbreviate the statement I submitted for the record.

I am very pleased to testify before the committee this morning on behalf of the Council on Economic Priorities. Public interest research groups on corporate activity are a relatively recent phenomenon in American political life, and we are gratified that the Congress is taking an interest in our work and in our views on what is probably one of the most difficult issues in American politics today: the role and responsibilities of increasingly concentrated corporate power in our country's social, economic, and political life.

For the past 7 years, the council has worked to define the meaning of corporate responsibility and to research corporate performance in America in areas which affect our personal and social existence: environmental pollution and its control, energy usage, equal employment, health and safety, and military production. Our research has covered

a variety of industries: pharmaceuticals, steel, oil, pulp and paper, retail merchandising, utilities, and defense. In addition, we report annually on stockholder and activist efforts to change corporate social behavior.

Our work has been widely used in corporate self-evaluation; consumer actions; Federal, State, and local legislation; and congressional hearings. Moreover, we have not worked alone. An increasing number of organizations have become involved in efforts to make corporate behavior accountable to the public. To list only a few, we are joined in our efforts by such groups as the National Resources Defense Committee, Friends of the Earth, Environmental Action, Media Access Project, the Interfaith Center on Corporate Responsibility, the Sierra Club, Corporate Data Exchange, Project Standard Oil, Clergy and Laity Concerned, Women's Action Alliance, the Black Economic Research Center, the North American Committee on Latin America, and the Institute for Food and Development Policy.

Slowly but surely our efforts are making headway. Corporate disclosure requirements, on which I wish to concentrate this morning, are gradually being broadened. Shareholders are demanding more responsible performance by the firms in which they invest. In a sense these are the disgruntled shareholders the preceding witness was looking for.

CEP research shows that corporate proxy resolutions on social issues have increased from 36 in 1972 to at least 105 this year. Even more significant is that companies are accepting such resolutions as binding policy at premeeting negotiations with their proponents.

Investors' interest in social responsibility work continues to grow, from the search in the 1960's for a "peace portfolio," to subscriptions to our publications, to greater media coverage for social responsibility issues. Some efforts even go beyond this level to raise fundamental issues about the criteria for chartering corporations. This committee is surely familiar with the effort to transfer chartering responsibility from the State to the Federal level. Perhaps the public interest can be more clearly defined at this level, where States will not be competing for the investment dollar by lowering standards of public protection and accountability.

I want to emphasize this morning that it is our sense at CEP that an increase in the flow of information on corporate activities is an essential first step in making corporations more accountable. Our task has been to gather and disseminate systematic information on the social impact of corporate activity. We have cast a wide net, seeking to make public information that many companies would rather keep private. Company environmental pollution, for example, once seen as an accepted external effect of production, and now the object of systematized clean-up efforts, has been one major focus.

Company performance in equal employment of minorities and women has been another. We have examined future energy choices and compared the cost of nuclear with fossil-fuel-generated power. And we have explored the intimate relationship between military producers and their major buyer, the Department of Defense, to which I will return. Some firms respond well and some badly.

In the steel industry, for example, one firm, Bethlehem, found our requests so ludicrous as to send us a copy of their latest comic book called "Mark Steel Fights Pollution."

The voluntary cooperation of the corporations under study has been an important source of information for CEP. Although voluntarism has an important place, such information is often haphazard. No two firms report on pollution and employment exactly alike. Nor do they report regularly, unless asked. And their replies to one public interest group are not necessarily available to others.

What we need to make our work more effective is stronger Federal corporate disclosure and reporting requirements. It is clear to us that neither our work nor public policies on corporate issues, that is, neither our work nor yours in Congress, can be effective without standardized, comparable, regular, and accessible disclosure of socially relevant corporate data.

By standard and comparable we mean that all corporations should report the same categories of information on comparable forms. By regular, we mean that such reports should appear on at least an annual basis. By accessible, we mean that one should not have to undertake a lawsuit under the Freedom of Information Act to pry the information loose. Both Government and the public should be able to obtain this data easily, from convenient locations.

I want to discuss two general areas of corporation disclosure which would make Congress and the public interest groups' work more effective. These proposals start from a basic principle, which these hearings have addressed, that corporations do in fact differ from individuals in their legal basis of existence, in the privileges that they receive from the State, such as limited liability, and citizens' rights (e.g., privacy) and they differ from the individual in their power. Hence, they have special standards of public accountability.

Legally, corporations obtain their right to exist from the Government. Thus the public has the right to make certain demands of them, in granting that public trust. More basically, corporations are more powerful in affecting people's lives than most individuals. Their ability to create and eliminate jobs, productive resources, and sometimes entire communities far surpasses that of any other institution, save government itself.

In the era of the multinationals, moreover, we may even be witnessing the eclipse of the Government's ability to exercise power on a par with that of a corporation.

Congress has already acted in ways which have encouraged greater corporate disclosure. The Environmental Protection Act and the Freedom of Information Act have already opened some avenues for increased disclosure. But a great deal more could be done to broaden and standardize disclosure. Congress has already helped in the effort to obtain the first type of disclosure; I want to discuss basic information on corporate structure, ownership, and production.

The regulatory agencies, in response to Congress urging in 1975, formed a steering committee and reported out a proposal on uniform disclosure which I have introduced in the record. If it were implemented, this model corporate disclosure regulation would apply to all firms regulated by Government agencies.

The first item covers corporate structure, that is, all subsidiaries and joint ventures, their names and addresses, bases of control, principal business activities, balance sheets, and so on. This would go a