they do a good job, the stockholders will prosper, and if the stockholders prosper, as a result of good management, everyone has prospered and the best way to work it out, I think, is through options, and yet this bill would prevent that.

Otherwise you will be making corporate management pay out large amounts of salary if they cannot measure that salary by results attained.

One of the best ways for industry is to let their men get their money through options, through doing a good job. I do not believe that the bill was intended to have the effect of barring such options, but under the wording, it is tied up.

Mr. WOLVERTON. May I ask a question?

Mr. HANCOCK. Yes, sir.

Mr. WOLVERTON. You would not carry that to the extent of a justification of the bonuses we have learned recently are being paid in large amounts?

Mr. HANCOCK. I would be very glad to take up the question of bonuses of the companies I am on the board of, and I venture that I could justify them.

Mr. WOLVERTON. It occurred to me in connection with your remark that if you justified a return for services rendered by an option privilege, that same reasoning might be applied to a bonus?

Mr. HANCOCK. It would depend upon the character of the bonus. If one is paid at the time when the stockholders are getting less and the employees are getting less, it is open to severe criticism. If the corporation is getting more, I see no reason why the officers of a corporation should not get more, and the option works out right along that line.

There is no reasonable chance for an officer under an option plan approved by stockholders to get a big bonus that may not have been earned during a time when the stockholders' earnings are going down.

Mr. LEA. Do you think that the bonus plan practiced during recent years has had any legitimate relation to the great bonuses that have been paid by these corporations?

Mr. HANCOCK. I am not sure of the stocks, not sufficiently acquainted with them to answer, sir. I saw a report in the papers yesterday, when I was traveling from the West. I came here last night, and I have not seen all the facts. I am perfectly certain that in my own case, and my own companies, I could justify them.

Mr. LEA. It looks to me as if in a large percentage of the cases the management of the corporations have used their power to reward themselves out of all proportion to the profits which were possibly available to the stockholders.

Mr. HANCOCK. That is the natural impression. I had the same impression from reading it, but that is not based upon knowledge; it is based upon ignorance on my part.

Mr. LEA. I think that the facts revealed will pretty well establish that fact.

Mr. HANCOCK. Well, would not the main question be whether the facts were revealed to the stockholders, frankly, and I do not mean revealed when nobody was present-I mean actually revealed to the stockholders showing a profit-sharing plan that was laid out in detail to the stockholders in the call for the annual meeting. If that were done, I do not see any objection to the officers getting bonuses if the stockholders have agreed.

Mr. LEA. Do you think there is any case in which these great bonuses have been permitted, where the stockholders were adequately informed as to what was taking place?

Mr. HANCOCK. I know I would not consent to it for any company whose board I was on, without their being informed. I cannot say, beyond my own, sir, but every time that question arises with us, the stockholders are informed about it, and know about it specifically.

Mr. LEA. The public generally has been ignorant of these vast bonuses. If the stockholders had known it, the public would have known it.

Mr. HANCOCK. Well, I do not know. You see, we have had a curious corporation procedure growing up where the corporations' stockholders are not much interested, and not only do not attend the annual meetings, but do not even read the annual reports or the records. The records are there, always available to them, but I think that they almost never read them.

Mr. LEA. That is the position of the uninformed shareholders.

Mr. HANCOCK. I would insist, and I do insist, that the facts be put out so that the stockholders cannot misunderstand them when they sign their proxies.

That is a character of abuse that I had in mind to cover and it will be covered in my memorandum.

Mr. HUDDLESTON. May I ask, Mr. Hancock, whether the propriety of options and bonuses does not depend entirely upon the good faith and honesty with which the authorities vote them and of the officer who receives them.

Mr. HANCOCK. Surely.

Mr. HUDDLESTON. If an officer has an undue influence over the stockholders, or the boards, and induces them to do something that is not really good business, then it is objectionable. On the other hand, if it is wholly a way of rewarding him for loyalty and ability in serving the corporation and is done with the eyes of everybody open, what is the objection to it?

Mr. HANCOCK. I see no objection to it.

The CHAIRMAN. Generally speaking and that is what we have got to depend upon here, not on specific instances generally speaking, you think, in view of the public sentiment that might be built up against us and the harm that might be done to an uninformed stockholder, that it is a good general practice?

Mr. HANCOCK. To pay bonuses?

The CHAIRMAN. Yes, sir.

Mr. HANCOCK. Yes, sir; I do think it is. I think it is a desirable practice to pay a bonus of some kind. I do not care whether it is a proportionate share in the business profits, or an option based upon results, but I do believe that you can attract the best of management and get the best out of them by an incentive, and I know of no other way of doing it.

Mr. HUDDLESTON. May I say that during the good years, as is known to all of us, a great many industries granted bonuses to the humblest employees working for them.

Mr. HANCOCK. That is right.

Mr. HUDDLESTON. Based upon a percentage of the earnings. Is there any objection to that?

Mr. HANCOCK. Not a trace. The only objection that there could be would be in a place where a man gives himself a bonus.

Mr. PETTENGILL. And, it has happened, like the Grace case, that Ohio case, a year ago. His own directors did not know about it.

Mr. HANCOCK. I did not hear you, sir.

Mr. PETTENGILL. I say, that in the Ohio case, which went to court 2 or 3 years ago involving Mr. Grace, of the steel company, there was not a director that apparently knew of his $1,000,000 bonus. As reported, there was not even a minute of the directors' meeting on it. That was just plain larceny, was it not?

Mr. HANCOCK. I am not in a position to judge.

Mr. PETTENGILL. You are not a director of that company?
Mr. HANCOCK. No, sir.

Mr. BULWINKLE. May I ask a question?

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Coming back to your original statement: You said the committee might have to think about Federal incorporation. Mr. HANCOCK. Yes, sir.

Mr. BULWINKLE. You mean Federal incorporation now, or an incorporation of the stock exchange?

Mr. HANCOCK. Federal incorporation law to cover all corporations. I do not see any particular advantage of incorporating the stock exchange, but you are going to have, I think, a clear drift of sentiment toward a Federal incorporation act, because except by that means, you are not going to be able to control, I believe, the things that need to be controlled.

Now, I am not a constitutional lawyer. I am not going to discuss constitutional law, or law in general, but, I believe that is where you are going to have to go.

Mr. BULWINKLE. All of the things that we are trying to control, including Mr. Huddleston's suggestion.

Mr. HANCOCK. Yes, sir.

The CHAIRMAN. What do you think about the margin requirements in this bill?

Mr. HANCOCK. I hope you are going to change them. I gather from the papers that you are. The difficulty that I find is in drawing any-pardon me. I said I gathered from the papers that you had decided to do that. Of course I do not know whether the papers are

correct.

The CHAIRMAN. The papers said that there was not going to be any stock-exchange regulation.

Mr. HANCOCK. Of course, we do not all believe what we see in the papers.

The lack of flexibility there is, I think, a problem difficult to meet. Giving the supervisory organization, whatever it is, the power to reduce loan values, I do not think is going to be effective. You are going to have some curious situations develop under this bill in connection with this 80-percent provision. As I read it; at least, it is going to produce this curious situation. A new security comes out tomorrow. It is registered. It is admitted to trading a month from It has not been on the market before. It is a new child. You may borrow on that 80 percent, I believe, whereas with an old seasoned security you may borrow only the 40 percent. You are going to allow

now.

more liberal borrowing on new securities than you are going to have on old seasoned securities.

The CHAIRMAN. Do you think that we should in an act here fix the margin requirements, or leave that entirely to the stock exchange?

Mr. HANCOCK. Well, you have asked me a pretty hard one, Mr. Rayburn. I believe that you will have to recognize the vice that some people find their way made easy to go into the market, and I believe you have to find some way to keep out of the market those who do not understand the risk of the market.

The CHAIRMAN. Well, that is our problem, and that is the reason why we are asking about it.

Mr. HANCOCK. You have got a curious proposition there, the 80percent provision as to new securities.

Now, I am in accord with a high margin requirement. I do not see anything to be gained by putting it in the law as against having it in the control of the exchange, or controlled by the Federal Trade Commission.

The CHAIRMAN. Now that is

Mr. HANCOCK (Continuing). I do not see how you will gain anything by putting it in the law as against having it either in the control of the exchange or the control of the Federal Trade Commission.

The CHAIRMAN. Do you think that there should be, as I think that somebody said, a "bright line" here the other day. Do you think that there should be any line around which the commission and the exchange should understand that they should not get away from, or that they should swing pretty close to it?

Mr. HANCOCK. I do not quite get your meaning, sir. I am sorry, but I do not know anything about a bright line.

The CHAIRMAN. Yes, Mr. Corcoran referred to something like a bright line, or some guide, in other words, leaving discretion with the Commission, after consultation with the officers, which presumably the members of the Commission would do.

Mr. HANCOCK. I think, gentlemen, you would be surprised to find, outside of those men who are here, and have to defend their positions, you would be surprised how many men recognize the good that has been done by the investigation. There is a quickened conscience today, which you may not appreciate, and a lot of the troubles that have been turned up-not by the investigation alone-but over the last 4 or 5 years are going to cure themselves, so far as honest men are concerned, and I believe that the best plan, beyond that, is a prohibition of specific abuses by law, adding only penal provisions.

The CHAIRMAN. Of course, that is always a problem in connection with criminal statutes. It is not the good fellow, but it is the fellow who will violate the laws, and so forth, and I presume that that is the reason why we are here, not to legislate against everybody that has anything to do with a stock exchange, or deals on one, but to attempt to eliminate the bad practices that are possible under the present conditions.

Mr. HANCOCK. That is right.

The CHAIRMAN. And everybody knows that if the stock exchange makes a rule, they can change it tomorrow if they so desire.

Mr. HANCOCK. They are going to respond to public opinion with a

great deal more alacrity than they have in the past.

The CHAIRMAN. But, they nearly ruined the public, before.

Mr. HANCOCK. They were not the only factor in that, sir.

The CHAIRMAN. I know that. We cannot legislate either to protect a man against his own folly, because there are a lot of people in America who are not willing to invest in stocks paying 6 percent. They want to put $10 into an oil well and take out $100 in 90 days. We are going to have to close. We are very much obliged to you. And, you can expand on any answers to the questions that the members have asked, and we will appreciate your getting your statement back as early as possible. We would like to print these hearings pretty soon.

Mr. HANCOCK. I have printed copies of my memorandum, if you want them.

The CHAIRMAN. We will be very glad to have them. You can put all of that statement in the record.

(A memorandum previously referred to and the statement above referred to follow:)

MARCH 3, 1934.

This is the memorandum I referred to in the hearing on March 2. I prepared it on January 24 before I knew of the present bill. On account of the exact reference I made to this memorandum I have not felt at liberty to modify it.

MEMORANDUM

JOHN M. HANCOCK.

Having in mind the legislation already passed and proposed, it still seems that the attack on the problem of protecting the investor has become largely an attack upon the bankers and brokers. Nothing has been done to provide current facts to the investor after the filing of the registration statement. Nothing has been done to establish better corporate practices. After all has been done that can be done in giving the investor the facts about the business it still remains impossible to appraise the management from time to time, and it is impossible to apprize the investor in advance of new developments which may affect his security.

Recognizing all of the difficulties there are in the way of a Federal corporation law it is believed that nothing effective can be done until the passage of such a law. It might be possible to embody many provisions in codes under N.R.A. The development of these practices might well be undertaken by a committee appointed by the President and composed of men of recognized public standing and from the several professions most directly concerned.

Many of these provisions, it would appear, could be included in a code for auditing firms which would make it an unfair trade practice for them to submit a report not complying with these and other acceptable provisions. If the corporations themselves are required to have audited reports, and then the auditor's conduct is governed by the code, it will be effective against the corporation. Not only that, but uniformity of practice among auditors would make it impossible for any corporation to discharge one firm of auditors in order to get more favorable treatment at the hands of another firm of auditors.

While accounting practice probably cannot be absolutely standardized, undoubtedly leading accountants will agree as to many things which should not under any circumstances be permitted. The building up of such standards over a time through the operation of codes ought to lay the foundation for subsequent permanent legislation.

In developing a standard of accounting procedure consideration should be given to revealing more of the facts of the business to the stockholders and any gain in this direction will be helpful.

The query naturally arises as to whether the present laws dealing with these problems are being enforced, and if not being enforced, what is to be gained by adding more laws. A study of this might well be undertaken.

It will probably be admitted that no law will enforce morality, and it is quite certain that no honest man can provide provisions for a law that will be truly effective against a crook.

It is urged that an attempt be not made to arrive at perfection in these matters in one effort. The developments which have taken place have been material over the years. Progress is being made, undoubtedly too slowly, but there is