that they will remain a stockholder, that is in the trust activities, and will vote against management's recommendations.

I think that has become an increasingly prevalent pattern among institutional investors, not only banks, but others as well.

Mrs. GROSS. We have indications that, although the banks like to remain anonymous, a number of them have voted against management on many of the various proxy proposals presented by the project and other groups. They also are exercising their influence in a more informal way in many instances. I know this happened back in 1972, when the project submitted a proposal regarding certain practices of the pharmaceutical companies and the banks were particularly concerned about these practices because they felt that they were terribly, morally unacceptable. I was told by numerous people within the financial community that there were a number of banks that took very vigorous stands by writing letters and going in and talking to management and using their shareholding positions in those pharmaceutical companies to try to influence the companies to change their policies. Senator METCALF. I am sorry. I have 5 minutes to vote. I would like to discuss with you some of the things that you raised about voting regarding pension funds and mutual funds, but especially, it seems to me, if there are substantial investments, somebody should get into this business on the public interest side, the pollution side that you talked about and so forth.

I tried to get my own university, Stanford University, to run maybe a business college graduate student or about-to-be graduate student, for the board of directors, and raise some of these questions on the basis of the stock the university holds.

But I really have to leave. I am sorry. It is a most interesting presentation. Let me compliment you on the work you are doing to try to being this forth for the American people. I think you are doing a great job for the consumer and for the general public. Thank you very much.

[The prepard statement of Mr. Schwartz with attachments follow:] PREPARED STATEMENT OF DONALD E. SCHWARTZ ON BEHALF OF THE CENTER FOR CORPORATE RESPONSIBILITY

My name is Donald E. Schwartz; I am a professor of law at Georgetown University Law Center in Washington, D.C. I have been on leave of absence this past year to serve as a visiting professor of law at New York University Law School. I am a member of the board of directors of the Project on Corporate Responsibility, Inc., with special responsibilities to serve as counsel in various proxy contests that the project has engaged with major corporations.

Let me briefly describe the project and some of its activities. The project is a nonprofit corporation, formed under the laws of the District of Columbia, in 1969. It was organized for the purpose of promoting greater corporate social responsibility. The principal method the project has employed to advance its goals has been by the submission of shareholder proposals, to corporations in which it is a stockholder, dealing with specific issues of corporate social responsibility. For example, the project has proposed significantly increased corporate disclosure of matters relating to discrimination, environmental pollution, safety, and political activities; it has pro

posed resolutions urging greater responsibility in the advertising and promotion of products; and it has submitted proposals that relate to the governing structure of corporations. The project has also actively sought the support of other stockholders, principally institutional investors, for these proposals through public interest proxy contests, or campaigns.

The first effort of the project was in 1970 in what became popularly known as Campaign GM. That proxy contest commanded considerable attention from the Nation's press. Two proposals, dealing with broadening the composition of the board, and disclosure to stockholders, were presented in its proxy statement and at a very lengthy meeting that was attended by more than 3,000 stockholders and more than 150 members of the press. Extensive accounts appeared in newspapers around the country, in national magazines and on network television coverage. See New Yorker magazine, June 22, 1970. That effort introduced a new atmosphere, and changed the tone of stockholder meetings held by all major corporations since that time. See Blumberg, The Politicalization of the Corporation, 26 The Business Lawyer 1551 (1971). The project has continued to submit proposals to General Motors, and to many other companies as well. The past year most successful, both for the project and the many other reform groups now on the scene.

The right of a stockholder to submit a proposal is established under the rules adopted by the SEC under the Securities and Exchange Act of 1934. It was recognized early in the life of that statute that stockholders do not, and could not, attend annual meetings in large numbers and that in fact the real annual communication with stockholders. occurred through the proxy statement solicited by the company. A stockholder's opportunity to propose a resolution at the meeting was of no consequence because he could speak only to a very small number of stockholders, and because most of the voting power had already been. given to management in the form of proxies solicited long before the shareholder appeared at the meeting to offer his resolution. Accordingly, the rules were amended to permit a stockholder to have a right to communicate his proposal in the same proxy statement furnished by the corporation to all the stockholders, so long as it dealt with a matter that was proper for the stockholders to consider. Since the rule was adopted in 1942, more than 5,000 stockholder proposals have been. submitted to the holders of American corporations.

Stockholder proposals do not win the votes of the majority of the stockholders, if management chooses to oppose the resolution as is customary. This is true for a number of reasons, including the fact that the stockholder is limited to only 200 words (until 3 years ago only 100 words) in support of his resolution while management could argue against it for pages. But the main reason is that stockholders tend to follow the lead of management, and if management recommends against the proposal, then as a practical matter it stands no chance of adoption.

However, by broad agreement, stockholder proposals are regarded as a very useful device. In many instances, management has, on its own, adopted the recommendations contained in the proposal some time after the stockholders had voted against approval of the proposal. This has been true with a number of resolutions dealing with management communication to stockholders, including proposals that

forced companies to hold their meetings in accessible places, compelled them to send out reports of the meetings to their stockholders followthe holding of a meeting and requiring stockholder approval of auditors. Indeed, Campaign GM believes it achieved a high measure of success in its 1970 proposals to General Motors, although neither proposal received more than 2.8 percent of the vote. One proposal urged the creation of a committee that would make a report to the stockholders of the social activities of the corporation. Although management fiercely opposed this, several months after the meeting the board of directors amended the bylaws to create a public policy committee composed of outside directors that would perform a form of social audit as an ongoing function. Although this was not the same as the project proposed, nor do we feel it nearly as good, it was nonetheless a very significant step forward for the company and it has since been copied by a number of other companies. Campaign GM also proposed to enlarge the board of directors so that it could nominate several persons of a background and experience that were not presently represented on the board. Thus, we proposed the election of Rev. Channing Phillips, who is a black community leader in the District of Columbia, and Ms. Betty Furness, a leading consumer advocate. It was also true that General Motors had neither a black nor a woman on its board at that time. Several months following the annual meeting, a black community leader from Philadelphia, Rev. Leon Sullivan, was elected to the board of directors by the directors. Last year, a woman Ms. Catherine Cleary, was also added to the board, marking the first election of a woman to the board.

We feel that shareholder proposals have a very beneficial effect on corporations. Among other things, they stimulate a debate on the part of the institutions who are forced to vote in favor or against the proposals, and resolutions compel the company to come out into the open and defend the social performance of their activities. In the process, much information is generated about the companies. Partially in recognition of the value of these proposals the SEC amended its rules in 1972, following a study of shareholder proposals, that had the effect of allowing more proposals to be submitted to the companies and narrowing the legal basis for excluding those proposals from the proxy statement. Only those proposals that are proper subjects for action by stockholders, under State corporation law, and that do not deal with ordinary business matters, are proper for inclusion in the proxy statement. Many new proposals have encountered legal objections to their place in the proxy statement, and considerable effort is expended in arguing over the meaning of the proxy rules. Stockholder proponents have enjoyed considerable success in these legal arguments. Since its first effort, the project has submitted 12 different proposals; objection to only one was concurred in by the SEC. By and large, proponents have enjoyed greater success since the rules were amended in 1972 than they did before.

Those who participate in public interest proxy contests have two basic needs. First, they must be able to communicate with the stockholders, including, indeed mainly, the institutional investors. Second, they must obtain information about the activities of the company that have a social impact, in order that they may talk about the facts. I can inform you, based upon the experience of the project, particu

larly with respect to Campaign GM, that it is difficult to meet those needs.

As I mentioned earlier, when a stockholder proposal is included in the corporation's proxy statement it perforce reaches all the stockholders of the company. In that sense, there is ready communication with all who vote. But that is insufficient as anyone who has ever waged a serious proxy contest can verify. A very short supporting statement is included in that proxy statement. Scarce opportunity is permitted to argue on behalf of the proposal. What is critically needed, to enjoy any measure of success, is the ability to follow up with proper solicitation, including face-to-face meetings on occasion, in order to persuade effectively. The shareholders list is necessary in order to engage in that kind of solicitation.

For some kinds of proxy contests the need is even greater. There is at least one instance of a public interest proxy campaign where a stockholder group ran a candidate for election to the board under a system of cumulative voting that enables a minority of the stockholders, if they are a large enough minority, to elect a candidate to the board. That was much in the style of an old-fashioned contest over candidates. Typically, each side employs more than one piece of campaign literature. One cannot entertain a glimmer of hope for success without having a copy of the stockholders list to permit the followup. In such a contest, the outsider is not relying on the corporation's proxy statement to carry the message; he relies on his own material.

Federal law does very little to advance the stockholders' interests or to meet the needs. There is no Federal right to obtain a copy of a stockholders list. The only thing that resembles such a right is rule 14a-7 under the Federal proxy rules which states that as a matter of Federal law one can compel the company to distribute his own soliciting material if management refuses to furnish the list. However, the question of whether the list must be furnished rests with State law. State law permits inspection of the stockholders list for a proper corporate purpose, under the law of all States. This right is often embodied in the corporation statute, although the rights exist as a matter of common law as well. Vindication of that right is normally by suit in a State court. For the most part State courts have liberally interpreted the right to inspect. There are several problems, however. In the case of General Motors the list, which the company agreed to permit the Project to inspect and to copy, consisted of approximately 118 volumes. What is needed in that case is a computer printout. General Motors agreed to furnish the tapes on which the list is maintained, but that is of no value unless one is able to devise a program from which the information can be extracted. General Motors did not agree to furnish the Project with its program. To develop such a program would have cost the Project in excess of $20,000, in 1971 dollars. While this might not be an obstacle to anyone who was contemplating a proxy contest for control of the corporation, an effort which is normally well financed and which if successful would permit the contestant to obtain reimbursement, but it is simply out of the question for a public interest group.

Another problem, with which this committee is fully aware, is that the information on the list is not always enlightening. The shareholder

names are often in nominee names and therefore require translation. I must admit that this would not have been a problem for us since we apparently encountered less difficulties than did your committee in obtaining a copy of the nominee book, thereby permitting a translation. But there can be a problem in the vindication of the right. General Motors agreed to furnish us with the rights to inspect and ultimately with the rights to obtain the tape without our having to go to court. I do not know that all managements would react the same way. In 1970 when a shareholder named Charles Pillsbury requested a copy of the stockholders list of Honeywell Corp. for the purpose of communicating with fellow stockholders in connection with matters of the public impact of the company's policies; that is, the production of antipersonnel weapons that were used in Vietnam, the corporation refused to furnish the list. Mr. Pillsbury went all the way to the Supreme Court of Minnesota, and that court, interpreting Delaware law under which the corporation was organized, found that the shareholder did not have a proper purpose in order to obtain the list, since his concern was not of a stockholder seeking to increase profits but rather was a matter of social policy. Pillsbury v. Honeywell, 291 Minn. 322, 191 N.W. 2d 406 (1971). The Delaware Supreme Court has since indicated that they do not regard that case as a proper interpretation of Delaware law, (Credit Bureau Reports, Inc. v. Credit Bureau of St. Paul, Inc., 290 A. 2d 691 (Del. Sup. Ct. 1972)), but the result is still very troublesome and will no doubt encourage some managements to resist production or inspection of the list, and, of course, some courts may agree with the Minnesota decision. Management can cause delay and expense by interposing its objection and putting the stockholders to the burden of going to court and using up some of their resources to litigate. Refusal to deliver the list, merely to harass the challengers, was a tactic used by the management of Northern States Power against a citizens group seeking to elect a consumer advocate to the board, a tactic roundly condemned by the Delaware Supreme Court. Schnell v. Chris Craft Industries, Inc., 285 A. 2d 437 (Del. 1971). (See N. Y.L.J., May 3, 1973, p. 1, discussing the Northern States Power controversy.) Eventually a list was obtained, but the delay was costly. Some may lack the resources and may have to abandon the effort.

One of the main uses of the list is to be able to communicate with the institutions. During Campaign GM we made the simple assumption that every institution owned stock in General Motors and therefore we sent soliciting letters to every principal bank, mutual fund, and other institution. That assumption, of course, will apply in very few cases. While it was possible to check from public records which mutual funds owned stock in the company, it was not possible with respect to other institutions, most important of which are pension plans administered by banks. There is at present no law that requires them to disclose their holdings. We think that this is a large deficiency in the law, and we note that the SEC has urged amendment of the law to correct it and we certainly are in favor of that amendment. We support H.R. 13986, S. 2234 and S. 2683 to that effect.

As I mentioned, the other major need is for proponents of resolutions, or for others who would challenge the social performance of major corporations, to obtain information about the company's activities. The Federal securities laws have gone a long way toward