Remedies for Management Misconduct.-Current remedies against management misconduct are inadequate. Criminal procedures and sanctions designed for robbers and murderers are generally ill-suited to corporate wrongdoing, and prosecutors, courts and juries are reluctant to apply them. Private class and derivative actions against corporate managers have been hobbled by procedural obstacles. Corporation law should be amended to provide for sanctions by a federal administrative agency against corporate managers and directors, including dismissal from office and disqualification from association with any large corporation in a managerial capacity. Provision should also be made for agency approval of new directors where pervasive corruption is demonstrated, as the SEC has required in a number of recent instances. Substantive and procedural obstacles to class and derivative suits should be removed, so that corporate managers and their associates can be held financially responsible for profits obtained through breach of their fiduciary responsibilities.

The changes I have suggested all fall within what has generally been considered the domain of state corporation law What then is the need for a federal corporation law? Can't these changes, if they are desirable, be made by the states? The answer is that they can, but they haven't, and they won't. The reason lies in the relationship between the giant corporations and the states. An eight billion dollar corporation is like an eight hundred pound gorilla. "Where does an eight hundred pound gorilla sit?" We all know the answer: "Anywhere it wants."

Most of the large corporations want to establish their corporate seats in Delaware, which in recent years has proved most imaginative in eliminating from its corporation law any restrictions which corporate management found burdensome and inserting any safeguard which management desired for its own protection. Typical of the former are the elimination of shareholder' voting or appraisal rights for many kinds of transactions, and even elimination of requirements for a formal meeting of the board of directors to approve management actions. Examples of the latter are the generous provisions for indemnifying corporate officers against civil liabilities and their expenses incurred in defending themselves in civil and criminal proceedings, and, most recently, a requirement that management receive 20 days prior notice of any tender offers for the company's stock so that it can more easily defend itself against a takeover bid. While Delaware has been the "leader" in this movement, other states (as well as the American Bar Association, in its "Model" Business Corporation Act) have supinely followed, for obvious reasons. While a state can effectively regulate an entity which conducts business largely within its borders, no state can effectively regulate the internal decision-making process of an entity incorporated in another state and conducting its business in many different states and even foreign countries. The only result of a state's enacting a "strict" corporation law is that the large corporations domiciled there will pick up and reincorporate in Delaware, as many of them have done.

What are the objections to a federal corporation law? The argument that a federal corporation law would infringe on "states' rights" is totally without substance. Whatever theoretical right the states have to regulate the giant corporations that do business within their borders, they have no practical power to do so. And whatever rights the people of Delaware may have, it does not include the right to launch a juggernaut with power to crush people in 49 other states, when its only connection with Delaware is the maintenance of a post office box and the payment of a nominal amount of franchise tax.

The argument that federal corporation law would be an "invasion of the free enterprise system" is equally baseless. It results from confusion of management with the corporation. A recent editorial in the Wall Street Journal referred to the modest proposal for outside audit committees of the board of directors, with power to blow the whistle on management misconduct, as the creation of "corporate commissars." The irony of this characterization is that it is the present allocation of power within the corporation that most resembles Soviet-style government. One man or a small group runs the entire enterprise, with succession to power based on the internal intrigues rather than a public elective process. Management decisions are ratified (or occasionally criticized) at regular meetings of a politburo (board of directors) and in annual plebiscites in which management controls the voting process and there is usually one slate of candidates which is returned to office with more than 99 percent of the votes.

I am not suggesting that we recreate our corporate government in the image of our national government, with three coequal branches and the elaborate

system of checks and balances built into our federal Constitution. But some of the ideas of due process and public accountability that apply to our governmental organizations could well be adapted for corporate use. For more than a century now, our government, federal and state, has given corporate managers a blank check in return for the "growth" which their unrestricted activities promised us. On the whole, it has not been a bad bargain. But growth is no longer the be-all and end-all, and we must search for ways to get the genie back in the bottle. The final objection is that a federal corporation law would create a vast new bureaucracy, creating greater inefficiency in our economic system. But a carefully drafted law could provide for internal controls on management behavior, without creating an unwieldy new bureaucracy. The rules could be enforced within the corporate structure, through existing agencies, and by actions in the courts. The need now is for an authoritative study, under Congressional auspices, that could produce a draft of a federal corporation law for consideration by the Congress early in 1977.

[Whereupon, at 12:40 p.m., the hearing was recessed.]

CORPORATE RIGHTS AND RESPONSIBILITIES

WEDNESDAY, JUNE 23, 1976

U.S. SENATE,

COMMITTEE ON COMMERCE,

Washington, D.O.

The committee met at 10 a.m. in room 6202, Dirksen Senate Office Building, Hon. Vance Hartke presiding.

Senator HARTKE. The committee will come to order. The first witness this morning is Jake Clayman, of the Industrial Union Department, AFL-CIO.

I might announce, just for the benefit of all concerned, that in the policy committee meeting yesterday, it was decided that in order to expedite the remaining business on the calendar, that no committee hearings would be permitted except for extraordinary emergencies beginning Monday of next week, and except for the purpose of consideration of nominees.

So that these hearings will be terminated, or all hearings will be terminated at the end of this week in this session of Congress. I don't know if that announcement has been made public, but it is not a secret.

All right, Mr. Clayman.

STATEMENT OF JACOB CLAYMAN, SECRETARY-TREASURER, INDUSTRIAL UNION DEPARTMENT, AFL-CIO; ACCOMPANIED BY RICHARD PROSTEN, DIRECTOR OF RESEARCH

Mr. CLAYMAN. Mr. Chairman, I have with me Richard Prosten, the director of research for the industrial union department.

I will not read my testimony, but would ask that it be placed in the record, and, hopefully along with it, one of the issues of Viewpoint, an IUD publication, which makes many of the points that we make in our basic testimony, but with greater itemization.

So let me proceed. I want to this morning simply itemize a few cases, a few situations, which indicate to us a relatively mammoth disregard for workers in the community on the part of many of our American corporations.

These situations indicate that there is a need for restraining some of these practices and not to continue to permit unbridled action on the part of some of our corporations and the need for more Federal regulatory action.

The remedies, in our judgment, are perceivable; some of them already are known to the chairman.

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Indeed, the chairman has given voice to some of these remedies, so far without success except to raise the visibility of the issues mightily, both in Congress and in the country.

And insofar as this has happened, it offers some hope that ultimately we may be able to obtain the kind of solutions that we think are

necessary.

Example: Every time I go to New England, as I suspect has happened to you, Senator, and I see the deserted factory buildings that once sustained workers and their communities, and have gone off to other climates, like the South, without any regard to the consequences to the workers, the population, to the community, I get another signal of man's inhumanity to man.

And of course this mass exodus has taken place in our time; while it has done something, of course, for the people of the communities that they went to, it has distorted and made shambles of the economy and the lives of tens of thousands, perhaps hundreds of thousands of people, by going to the South for low wages, and so-called tractable labor, with concessions made by the State and the communities to which they migrated-tax concessions, free buildings funded by the communities taxpayers' moneys, and many other inducements, without even an apology to the great masses of people affected in New England and in upper New York State, in Pennsylvania, and elsewhere. And I offer this, Mr. Chairman, as one general example of the kind of disregard for the human condition which is accepted as a matter of course in our country.

In some democratic countries this doesn't happen as readily. In some democratic countries, Western Europe, the Scandinavian countries, and others, there is some restraint on this unbridled permit to travel wherever they see fit without concern for what happens in the community they left.

As I say, it is one of the sad commentaries on our situation in the United States and I feel kind of melancholy every time I go through a New England town where this is the unhappy fact.

Example: I am thinking now of the little town of Owensboro, Ky., not very far from the border of your State, Senator. I remember being there a couple of years ago, invited to a meeting they were having, and there I learned something that otherwise I might not have known about, obviously the public doesn't know about it, the Senate, I suspect, does not know about it, this committee doesn't know about it. GE simply took lock, stock, and barrel most of the machinery from the factory, making parts for TV's, called TV mounts, television mounts, and sent it to Singapore. Two thousand workers in that relatively small community-I am sure you have been there, Senator-were out of work, many of them had spent half a lifetime there, middleaged folks, the average age of the working community was relatively high. No jobs in the community for them to go to. The whole business of retraining was senseless, useless. Retraining for what in that community?

And the question obviously for this committee, for the Senate, indeed for the people of the United States is-should a company be permitted to do this with complete impunity because its operation is more profitable in Singapore?

Of course I need not tell you what has happened-this is simply one example of it-what has happened to the television industry. I think we now have about 4 or 5 percent of the black and white TV industry left in the United States. It has all gone abroad, taken abroad by American multinational corporations, simply by their own fiat. No one passed judgment on it except the corporations, I assume except its managers, rather than its stockholders.

The color TV is going the same way. In the course of a few years the penetration from abroad of color TV has gone from 2 percent to 26 percent. Every likelihood is that in a few more years we will have no color TV, and there are thousands, tens of thousands of workers in that industry. What becomes of them? What becomes of our own. necessity for some kind of commitment in terms of national defense and otherwise?

Example: Royal Typewriters, Litton Industries, one of the bright new guys on the block, multinational corporation, conglomerate. They had a bit of a labor dispute in Springfield, Mo., and they used the labor dispute as an excuse-when in fact they made their policy, long before the labor dispute-to ship out lock, stock, and barrel the entire machinery from the Springfield plant to Portugal. And now Litton makes its typewriters, bearing the Royal name, there.

What arrangements there are between Litton and the Portugese industrialists who manufacture them there I don't know. But we do know that the workers stranded in Springfield haven't yet had their vacation pay settled, and the plant closing happened years ago, and haven't had their pension rights clarified yet.

Example: J. P. Stevens has become one of the famous cases in point or infamous, depending on your point of view. This is a situation again where the results have been the product of corporation domination of the communities in which they manufactured, right-towork laws, quiescent worker population, full of fear-and this is remarkable in our country, where we prize ourselves on our ability to stand up and talk to each other.

Twelve years ago-and I recite some of these facts in our written testimony-12 years ago both the Industrial Union Department, for whom I work, and represent here today, and the Textile Workers Union, started the process of trying to organize J. P. Stevens down south, a big corporation, about 40,000 employees.

Now let me give you the litany of woe. J. P. Stevens was cited 15 times by the National Labor Relations Board for violation of U.S. law, labor-management laws. Almost all of these cases, perhaps with one exception, were upheld by the U.S. Court of Appeals, because the company automatically appeals every case. The Supreme Court refused writ of certiorari about three times. The company was required to pay $1.3 million to workers because they were wrongfully fired, illegally fired. They had to pay $50,000 in a settlement because of wiretapping, a wiretapping case and the wiretapping being the company people.

But, you see, Mr. Chairman, this was a cheap price to pay, $1.3 million and $50,000, and I don't know what their attorneys' fees might be, but they are probably astronomical, but it was a cheap price because for 10 or 11 years they have been able to thwart unionization, and for 10 or 11 years they have been paying substandard wages, and

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