From Main Street to Wall Street

I

ONCE upon a time, — and it was n’t so long ago, either, — down in Boothbay, Maine, there were two brothers, John and James. Their last name was Doe. John, the elder, was quiet-eyed, slowmoving, and comfortable, temperamentally. James was more jumpy, nimble-witted, ambitious to get on. One stayed on the farm; the other naturally gravitated to the city. In due season John’s boy prepared to enter the academy at Damariscotta. Said his father: ‘Son, you’re getting grown up. Suppose I die — you ought to have something all your own. I’m going to give you that best Jersey heifer. But you must remember to keep her well fed and healthy so that the milk will be pure. And keep her horns cut, in case she gets pernickety. Remember also that the fence in the northeast corner of the pasture is getting shaky. She might wander out on the highroad and upset somebody in a Ford. Because she’s all yours, it’s up to you to see that she behaves herself.’

About the same time James, in the library of his city house, thus delivered himself to his son: ‘Now, Junior, before you go to college I want to give you my investment in the Boothbay Harbor Electric Light Company. This concern serves our old neighbors and friends, and I want you to feel a continuing interest in, and a responsibility for, our share in this local enterprise. If properly managed it should be a benefit to this community; and it will yield you an income to be applied to your education through the next few years. But you must never forget that you are partly responsible for this undertaking. Our family had a hand in starting it. That responsibility is an inseparable part of your ownership. I read something the other day, in an opinion by Justice Brandeis of the United States Supreme Court, which bears this out: “There is no such thing to my mind ... as an innocent stockholder. He may be innocent in fact, but socially he cannot be held innocent. He accepts the benefits of the system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with the public welfare.” He is right in that. This accountability for wealth underlies and justifies the whole institution of private property upon which the government of our great country is founded.’

Thus did two men, good and true according to their several lights, recognize the public obligation that attaches to wealth. But how different were the results! The son of John, under the old simple conditions, continued to cherish, and in the community to stand sponsor for, his Jersey heifer. But with the son of James complications speedily developed. First of all, the Central Maine Power Company, heading up in Augusta, induced a majority of the stockholders in the local corporation to exchange their holdings for shares of the larger concern. There was nothing else to do but to follow along. Then a great consolidation was announced. It was headed by the Middle West Securities Company, incorporated in Delaware, which took over the Central Maine Power Company and made it a part of an intermediate corporation, known as the New England Public Service Company, which through the Manchester Traction Light and Power Company and the National Light and Power Company (which latter itself owned the Twin State Power Company and the Vermont Hydro-Electric Company) covered all northern New England. Thus, by the close of 1923, the son of James had become a partner with 53,999 others in a joint investment of over $52,000,000 in stocks alone. The main office of the company had moved to Chicago (the annual meeting still being held in Delaware, however). The little New England corporation was now indissolubly bound up with five others in Illinois, three in Indiana, three in Kentucky, two in Oklahoma, one in Oklahoma and Texas, one in Missouri, one in Michigan, two in Nebraska, two in Virginia, one in Wisconsin, and one in Tennessee. This was the chain, constituted of many links, which made up the sole and tenuous connection between the son of James and his original electric-light investment. It began to look indeed as if the days of the simple life and of direct responsibility of ownership were by way of passing in the field of public utilities in New England.

James and his son. thus lost in the shuffle of public-utility corporations, turned to the field of private enterprise, in which, as they had been told, personal initiative still held sway, free from the deadening influence of governmental supervision. They perused the offerings of securities in the press by well-known and responsible firms. Might they not hope to acquire direct ownership in corporations which themselves managed the business? The first stumblingblock was the holding corporation. They had become used to this complicated financial device in the large concerns like the United States Steel Corporation or the General Motors Company. They sought for less stupendous undertakings. One banking house offered gold notes which invited participation in the affairs, not of the Kaufmann Department Stores, Inc., ‘conducting the largest department-store business in the city of Pittsburgh,’ but only of a holding company, the Kaufmann Department Stores Securities Corporation, a finance or intermediate company. Another offering was of Stern Brothers, New York, ‘one of the oldest and best-known department stores in the United States,’ but ‘to ensure continuity of management and policy the common shares will be placed in a voting trust.’ Perhaps they sought an interest in the biggest hardware company in the United States. They found, however, that the Associated Simmons Hardware Companies merely controlled an immense business in St. Louis, deriving their status as a legal trust from Massachusetts. The DeForest Radio Company offering was yet otherwise eviscerated of all possible voting power by another kind of voting trust.

Coca-Cola sounded refreshing. A company chartered in Georgia turns out some 25,000,000 gallons of a popular beverage, presumably at a profit. The stock is publicly listed and very widely held. But some 251,000 of its 500,000 shares were found to be lodged in the hands of a knot of insiders, incorporated as the Coca-Cola International Company. No shares of this corporation which held control were listed or available as a purchase to James or his son. Answering an advertisement of securities of the Associated Gas and Electric Company, they found that its business was really conducted at the office of the Associated Gas and Electric Securities Corporation — another finance company? From Armour and Company of Delaware, whose common stock was all owned by Armour and Company of Illinois, down to the latest offering of a dairy-products concern, everything was tied up in this way. Hopeless indeed did it appear that any uninitiated public investor could understand, much less participate intelligently in, any of these affairs.

Nor was James wholly to blame for the loss of direct contact and responsibility between his son and his investment. For, finding himself getting on in years and being mindful of the mutability of human affairs, he might have taken out a charter as ‘James Doe, Ltd.’ — better, perhaps, than ‘Inc.,’because carrying the suggestion, among other things, of a limited liability for inheritance taxes. His son and his wife holding practically all of the stock in this immortal creation, no investments coming to them upon his death would cause a ripple in the Probate Courts. Or, possibly, he put his possessions in a private trust, managing it himself as trustee during his lifetime, thereby splitting up the income and still further reducing taxes. Or the management of this ‘living trust’ might have been turned over to a professional trust company. And any one of these agencies might in turn have purchased ‘Collateral Trustee Shares in the New England Investment Trust, Inc., the First National Bank of Boston, Trustee,’ or some similar investment concern, properly enough intended through diversification to spread the risk. And, finally, there was the life-insurance policy, based entirely upon investments to be handled by these great fiduciary corporations for him as agent, at the longest possible range.

II

What an amazing tangle this all makes of the theory that ownership of property and responsibility for its efficient, farsighted, and public-spirited management shall be linked the one to the other. Even the whole theory of business profits, so painstakingly evolved through years of academic ratiocination, goes by the board. All the managers — that is to say, the operating men — are working on salary, their returns, except on the side, being largely independent, of the net result of company operation year by year. The motive of self-interest may even have been thrown into the reverse, occasionally, so far as long-time upbuilding in contradistinction to quick turnover in corporate affairs is concerned. And what has become of the relation between labor and capital? What guaranty may possibly be given by the real owners to the working class that there shall not be taken from it an opportunity for future welfare and development as a result of these changes? Veritably the institution of private property, underlying our whole civilization, is threatened at the root unless we take heed. The situation is not inaptly described by the colored candidate for the ministry, confronted by the request of the examining Board of Preachers to name some character in the Bible and then to relate all that he knew about it. ‘Ah thinks Ah’ll take Jezebel. Jezebel, she was a hussy, a-settin’ up at a winder when David come down along th’u’ Jerusalem. An’ she hollered at ‘im. An’ he said, “Ef I got a frien’ up there, let him th’ow ‘er down.” An’ ‘e had a frien’ up there, an’ ‘e th’ow’d ‘er down. An’ David said, “Let ‘im th’ow er down again.” An’ ‘e th’ow’d ‘er down again. An’ David said, “Let ‘im th’ow ‘er down seventy times seven.” An’ ‘e th’ow’d ‘er down seventy times seven. An’ she busted into a thousand pieces. An’ they gathered up the fragments that nothin’ be lost. An’ de question are: Whose wife am she at de Reserrecshum?’ It is a query which might well be propounded at this time to several millions of our fellow citizens, in so far as they are part owners in the $70,000,000,000 capitalization of American corporations, according to the Federal tax returns, in the year of our Lord 1923.

Thus far, however, the multiplication of these entanglements constitutes no innovation. They have been going on for a long time, insidiously undermining the principle of accountability. The individual and partnership forms of business organization disappeared in favor of the corporation even before the war. Well-nigh a thousand companies are now listed on the New York Stock Exchange alone— 163 railroads and 763 other corporations in 1924. But since the World War, and particularly in this heyday of prosperity, the facile initiating and legal minds have hit upon something better yet — and something, furthermore, which puts once and for all at rest the last vestige of power of participation of the owners of property in prudent and efficient management. These last two years, 1924-25, promise to go down in history —like the Year of the Plague, or the Year of the Big Wind — as the Years of the Split Common Stock and the Vanishing Stockholder.

Even before the World War the practice was not uncommon, outside of railroads, of setting off preferred shares as nonvoting. The amount of these issues was in those days adjusted to the tangible assets, leaving the common shares to represent the equity, which depended upon successful management to be secured by the exercise of the voting rights. The late invention now splits up these common shares. To be in the mode one has, let us call it, a ‘Class A participating’ common stock, with a first lien on earnings after satisfaction of all prior claims of preferred stocks and bonds. This leaves a ‘Class B’ common stock representing, according to circumstances, the cream, the scum, the froth, or the sediment of the business; for the full voting rights attach exclusively to these Class B common shares, none, or only a minority, of which are offered to the public at all. The appetite for the preferred shares may sometimes be whetted by a flavoring of the Class A common shares, but not of those which carry votes. The recent ‘Dodge Brothers, Inc.,’ is typical. A banking house buys up a private business for, it has been said, $146,000,000 or thereabouts. This sum, and more too, they recover — if the plan works out — by the sale to the public, for $160,000,000, of bonds and preferred stock at par and 1,500,000 nonvoting shares of Class A common stock. But not a single one of the 500,000 Class B voting (no par) common shares are thus sold. The promoters have virtually paid themselves a handsome profit for the assumption of the entire directorial power, having mortgaged the property to the full amount of its original cost through outstanding bonds and preferred stock, including both assets and capitalized earning power. And the amazing thing is that this final deathblow to the exercise of voting rights by the general public has brought no voice of protest. Yet the plan bears every appearance of a bald and outrageous theft of the last tittle of responsibility for management of the actual owners by those who are setting up these latest financial erections. Is n’t it the prettiest case ever known of having a cake and eating it too?

Perhaps the baldest case is of an artificial-silk concern, the Industrial Rayon Corporation, with 598,000 shares of nonvoting Class A stock distributed to the public, with the reservation of the remaining 2000 out of 600,000 shares, as Class B stock, carrying exclusive voting rights. Or the invitation to participate in a well-known root-beer enterprise with 180,000 shares of Class A and Class B common shares with the concentration of control in 3872 ‘ Management Shares.’ It savors rather of supererogation to add in the prospectus, ‘The management of the company will remain unchanged and continue in charge of the members of the Hires family.’ Or take, if you please, a wellknown theatre enterprise, said to have over $20,000,000 in assets. There will be 4,000,000 shares — 3,900,000 Class A shares to be sold to you and me, and 100,000 Class B shares, in which will be vested exclusive control through voting rights. Furthermore, the Class A and Class B stock will divide the net earnings 50—50.

There is no concealment about all this. It is perfectly open and aboveboard. But who, we ask, under these circumstances has really given a hostage to fortune, to the public, or to the employees for honest and economic management of the business? The promoters stand to lose only the amount of their stake — a minus quantity in dollars in so far as the nonvoting shares have been made to cover not only the value of the tangible assets but the prospective capitalization of earnings. It is the public stockholders, the consumer and the wage-earner, who stand to lose in event of misdirection. How can there be other than a whirlwind of abuse of power under such conditions?

Nor is it our great basic industries which are being swept by this plague. Most of the great combinations had their rise twenty-five years ago, with a minor outbreak in 1911-12. To-day it is neither the Steel Corporation nor the Harvester Trust nor the railroads which are following these newly beaten paths. Look at the newspaper offerings! The public is buying out the mail-order, chain, and department stores, foodstuff manufacturers, the makers of washing machines, refrigerators, confectionery, make-believe-silk stockings, toilet and beauty preparations, music, tags and napkins, phonograph records, pianos and radio outfits, theatres — our daily bread, our ice cream, root beer, cake, and even our homemade pies. At this rate every conceivable article of direct or indirect consumption will soon be more or less in the hands of the general public.

Most disconcerting is it when this latest financial development invades the field of public utilities, already sufficiently cluttered up with holding companies and trusts. The older and conservative companies are above criticism. But one takes exception to the offerings of the Southern Gas and Power Corporation, with an authorized note issue of $2,000,000, preferred stock $5,000,000, and Class A 250,000 shares, leaving the exclusive voting power, except in case of default in cumulative dividends, in 100,000 shares of ‘common stock, without par value.’ It is these last which are not offered to the public at all. This organization controls operating companies in thirtyseven communities, scattered over eight different states. Was there ever a clearer case in an essential public industry of what has been well defined by an expert as ‘one of the besetting sins of modern corporations . . . the custom of trading on a thin equity, control resting in the hands of common stockholders, while the funds are supplied by the sale of preferred stocks and bonds’? Had this author written in 1925, he would have added ‘and even of a large number of common shares which have been stripped of voting power.’ Then he would have hit several nails squarely on the head with one rap of the hammer.

III

There is of late another financial practice, also, which greatly accentuates this nullification of the ordinary shareholder. This is the wide distribution of stock to employees and the consumers of the corporation’s product, whether electric service, steel, or what not. The effect in any event is bound to be cumulative with that of the insinuation of professional management power between ownership and operation.

Corporations have always been susceptible to control by concentration of voting power. Far less than half of the capital stock may be as effective for such control as possession of an actual majority. But it is elemental — requiring no proof — that, the larger the number of shareholders, the more easily may a small concentrated block of minority shares exercise sway over all the rest. With a dozen owners, probably 51 per cent will be necessary for dominance. With 300,000 scattered holdings, a possible 15 or 20 per cent of the votes can never be overmatched at an election. In 1923 there were 250,000 new stockholders registered in the electric light and power companies alone. The total number of stockholders in all sorts of concerns has almost doubled since 1900, rising to an aggregate of 14,423,000 in 1923. These shareholders now possess over $70,000,000,000 worth of stock at par, on the showing of the Federal incometax returns. Such possession used to be confined to the wealthy and the well-to-do class. Now it comprehends the small householder and large numbers of wage-earners. The former concentration of wealth is now yielding place to so wide a diffusion as to call for public recognition by way of legislation or oversight. But the important point to note is that, the wider the diffusion of ownership, the more readily does effective control run to the intermediaries. Financially, the matter is dangerous, for it tends to transform a contingent outstanding charge upon earnings into virtually fixed charges thereon. The cessation of dividends, either to employee holders or to consumers, is bound to be so productive of discontent and unrest that every nerve will be strained to the utmost, even overlong, to prevent their cessation.

But there is more yet to this story of the rape of the public stockholder! Far too many of these new securities are subject to the following proviso, which looks white enough superficially, but which has more than an indication of color at the base of the finger nails: ‘No holders of stock of the corporation, of whatever class, shall have any preferential or other right of subscription to any shares of stock of any class, or any securities convertible into shares of the stock of the corporation, nor any right of subscription to any thereof, other than such, if any, as the Board of Directors in its discretion may determine, and at such price as the Board of Directors may fix; and any shares or convertible securities which the Board of Directors may determine to offer for subscription to holders of stock may, as said Board of Directors shall determine, be offered to holders of any class or classes of stock at the time existing to the exclusion of holders of any or all other classes at the time existing.' Such clauses, with devilish ingenuity, look sound enough above the water line; but they certainly will not stand examination in dry dock. For not only has the shareholder parted with every vestige of control of the enterprise represented by his investment, but now he makes a free gift of such rights as may accrue, resulting from future growth of the property. Heretofore it has been a fundamental rule in corporation law that there shall be no discrimination whatsoever between shareholders. Discrimination there may be between creditors and owners; but by this device even the common shareholders are now set off, to the end that an inordinate share, if indeed not all, of the increment of profits in future shall attach to the holdings of those who are ‘in the know.’

Why do stockholders submit to such indignity? The technique is simple, relying upon a fundamental attribute of human nature. Mr. Robert F. Herrick of Boston, in a frank address on holding companies, describing the manner in which the exchange of shares in one corporation for those of another may be brought about, thus puts it: ‘All the stockholders act like a flock of sheep. In the main they follow the lead of the directors, and if the details of carrying the plan through are so arranged that the stock in the new company has an apparent money value greater than the stock of the old company for which it is offered, the exchange once started takes place generally, and when a majority of the stock in the companies is exchanged, practically the consolidation is effected.’ There you have it in the words of an expert!

IV

It will be objected that no real change is involved in these recent tendencies: that stockholders never did, and never will, exercise their voting rights. In fact the great trouble, oftentimes, is to secure enough proxies in widely owned corporations to validate the acts of their directors. But the fact remains that the power, even if rarely exercised, and then only under extreme provocation, was there; and every once in a blue moon some resolute individual or stockholder could rise in his place and organize a protective committee or dissenting group — and, if nothing else happened, at least there was a thorough ventilation of what sometimes proved to be a musty or unsafe tenement. Furthermore, one of the most encouraging things in life is the influence that can be wielded by an individual, acting almost single-handed and alone, to confront and often to overcome a corporate Goliath, provided he has the right on his side. My mind runs to the extermination of the Louisiana Lottery by a former colleague, Professor Homer Woodbridge: think of it — Professor of Heating and Ventilation at the Massachusetts Institute of Technology! Or recall what Charles and Philip Cabot achieved in bringing about the elimination of the seven-day week and the twelve-hour day in the United States Steel Corporation! Or Lois Burnett Rantoul, undauntedly facing down every corporate influence in the Massachusetts Legislature, and bringing about the enactment of the first eight-hourday law for women and children in the United States! Such things as these give one good heart, leading to the belief that the power of personality, alone, may win the most astonishing victories in the face of overwhelming odds. But all such achievement in this field of management of property is closed out forever once the people who own that property have allowed themselves to be utterly divorced from the exercise of their natural right to elect the directors and to influence, if not to determine, the corporate policy. For by such an abdication they give themselves over, body and soul — becoming mere wards, non compos mentis, so far as control over their own affairs is concerned. It is all so absurd, theoretically, that it seems incredible. Yet here are the facts!

But if the trend of corporation law and practice has been so consistently in the direction of diminishing rather than of accentuating the responsibility and accountability of the real propertyowners, what is to be done about it? This, to my thinking, is a matter of vital concern to the successful functioning of our capitalistic system. For, at this particular juncture, the final deathblow to such accountability seems to be in the very act of delivery. Many suggestions have been made from time to time; some of them have already been successfully applied to our railroads. A few now bear upon our other public utilities. But absolutely nothing has yet been done to stem the current, much less to reverse it, as respects private business corporations. Something, to be sure, has been accomplished in the way of enforcement of liability for downright mismanagement or negligence, as against directors. But all such remedies, even when successfully invoked, — as for example on the New Haven Railroad, in the Old Dominion Copper suit, or in the well-known American Grass Twine and American Malting Company proceedings about 1903, — are but cases of hanging the murderer after the innocent victim has expired. The reliance upon the courts, also, at best entails protracted and expensive litigation. Furthermore, too great an increase of such liability of directors, with the possible harassment of blackmailing or other proceedings, might readily enough make it impossible in future to secure the services of really able and responsible persons. Something may possibly be accomplished in this direction, but other and simpler remedies would seem to lie more nearly within reach.

Why not restrain the holding company? ‘Swat it!’ says one public spokesman. I would do so: yet ever with a nice discernment. The fly — bluebottle, horse, domestic, or gad — is always a pest. Not so the finance corporation. It has its proper place and function in the scheme of things. But within that domain it should be rigidly confined. The very complexity of our form of government, involving relationships which transcend state boundaries, almost inevitably brings forth a litter of creations deriving their powers from the governments of the different commonwealths. This is a necessary outcome of the local demand for compliance with local needs. Piling of one corporation upon another also simplifies finance and management, augmenting credit and enabling largescale operation and the employment of higher-paid technicians. But it is also true that a large part of this complexity is the result of a deliberate intent to assume and concentrate power in the hands of an inner circle. The primary test of good faith is mathematical. When the Associated Merchants Company (of Connecticut) controlled, as it once did, the H. B. Claflin (dry goods) Company (of New Jersey), which in turn owned the operating H. B. Claflin and Company (in New York), by ownership of 45,001 out of 90,000 total shares, appearances are certainly against the arrangement; but when, as in the Continental or Purity Baking Corporations, recently set up, a bona fide attempt is made to secure all of the shares in the many operating concerns, the advantage and even the necessity of the plan are obvious.

Wade Ellis, the then attorney-general of Ohio, speaking twenty years ago, stated, in words which now seem prophetic, the case against the holding company: —

‘This is the most effective, the most invidious, and the cheapest of all combinations in restraint of trade. It is the most effective because, while agreements, and especially unlawful ones, may easily be broken, a transfer of the stock puts the bargain beyond the power of any conspirator to escape. It is the most invidious because, while it conceals all, it fears no exposure. It is the cheapest because it requires less money to buy a controlling interest in the stock of the competing companies than it does to buy their property, and yet the promoters have the use of the investment of all the minority holders in all the corporations brought under their control. In fact it generally requires no money at all, for the stock in the subsidiary companies is paid for in the stock of the holding company. Thus a vast industry is brought under the domination of manipulators whose circulating medium would not be a legal tender anywhere except on the stage.'

I venture to suggest the possibility of drawing the line between the use of such a device to concentrate control in the hands of insiders, contrary to public policy, and the performance of its legitimate function in the field of business. What a dull and rigid life as human beings we should be compelled to lead if our backbones were fashioned all in one piece. Even a corporation, to my thinking, may benefit from a proper amount of articulation. But it need not be a vaudeville contortionist, for all that!

V

What shall be said of the proposition that bondholders should be given voting rights, pari passu with the stockholders? One of the first acts of Governor Roosevelt of New York in 1900 was to appoint a special commission to draw up a model Companies’ Act. Section 61 of this proposed statute made it permissive to confer voting power upon debentureand bond-holders ‘equal and equivalent to the stockholders.’ Most eminent legal talent supports this contention with reference to railroads. I have always believed it desirable and feasible, whenever it is apparent that the real capital in the enterprise was provided through the sale of bonds, leaving the stock merely to represent real or anticipated capitalized earning power. Too often in the early days this used to be true of railroads. Many of them, however, have now waxed prosperous enough to fill out the measure of their financial clothes. The present situation among purely private corporations, in this instant wave of transformation, thoroughly supports the proposition that for many of these companies practically all of the real capital is advanced either by bondholders or by those who hold preferred stocks, which are in reality bonds. They are bonds in every vital respect, except that they have no foreclosure rights. But the preferred stocks have been bereft of all voting power, except and until the cessation of dividends. The amount of them issued, moreover, coupled with the Class A participating or nonvoting common stock, not unusually nowadays equals the full measure of material assets, plus capitalized present and prospective earning power. The proposition to enfranchise the bondholders, at least, is yet further fortified by the fact that the great life-insurance companies, which ordinarily confine their investments to bonds, have at their disposal expert financial talent of a high order, which might serve most acceptably upon the directorates of many of these companies — say, for example, public-service corporations or the larger purely private business concerns.

The objection offered whenever I have advanced this proposition is that the bondholder is a ‘money-lender’ and that his intrusion into management ‘ignores the private property rights of the stockholder.’ Stockholders, forsooth! Who are they, indeed, in Dodge Brothers, Inc., where the only real stockholders — that is to say, those who have any power of direction — are bankers who have, for a handsome consideration to themselves, condescended to strip all the voting power from three quarters of the common shares — that portion alone which is sold to the public. Perhaps somebody will have the temerity to maintain that the remaining quarter — of Class B common shares, having ‘exclusive voting powers for all purposes,’ which the bankers retain for control — as exclusively represents the real owners of the property. Tush! Everybody else is no more a stockholder, so far as management is concerned, than is the elevator boy or the apple woman on the corner.

Another pulmotor for the possible resuscitation of this moribund stockholders’ responsibility is that of cumulative voting. For ten years past it has been my privilege to serve as a director of the Rock Island Railway, whose ancient charter, Section 9, permits each stockholder either to vote ‘for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors, multiplied by the number of his shares of stock, shall equal, or distribute them on the same principle among as many candidates as he shall think fit.’ That proviso put a watchful minority at the switch, at least until such time as mutual confidence and friendly relations all round had cleared up the situation. Thus is the standard provided of at least a temporary two-party system, which conforms to the praiseworthy criterion set by the Railway Age, ‘that there should be someone continuously watching the detailed operation of the road in the interest of stockholders, other than the controlling interests, and in the interest of bondand note-holders.’ The conservative constitution of Pennsylvania gave its distinguished approbation to this plan, by requiring at one time that all corporate charters should provide for elections under such cumulative voting. Many of the great British banks, including the Bank of England and the London and Westminster, graduate the voting power of shares, to prevent superdomination by the large stockholders. Roosevelt’s New York Commission in 1900 recommended the authorization, in a model Companies’ Act, of ‘any plan of cumulative or proportional voting.’ Granted that the proposal needs safeguarding, to prevent obstructive and hold-up tactics, it nevertheless embodies a principle worth consideration. We ought to be adopting the practice to-day, instead of splitting off the management shares from the main body of the capitalization.

Inside control in practice often relies upon the voting rights attaching to floating stock in the market — that is to say, stock which is passing so rapidly from hand to hand that, for convenience’ sake, it remains often for many years registered in the name of banking or brokerage houses. And, in the case of non-dividend-paying corporations, the proportion of such floating stock may be so great as, in and of itself, to carry control. And a system, not unlike logrolling among Congressmen, under such circumstances enables interchange and common understanding along the ‘street’ to perpetuate control by those who may not, in fact, have a dollar of actual stake in an enterprise. It has been proposed to disfranchise such floating stock. It might be serviceable; but the practical difficulties in the way of carrying out such a plan seem to me insuperable.

VI

This present tendency to strip the public shareholders of their voting rights may be checked, either through revision of our corporation laws, or by a vigorous attitude on the part of the courts. Direct action by the investing class, by boycotting all such offerings of securities, may give even more immediate results. But, in either or any event, no other safeguard against misuse of power by insiders is so likely to be effective as publicity. Nothing kills bacteria like sunlight. A frank sharing of all proper information with the main body of the shareholders is basically right. It is also in the long run a matter of good business. It is absurd that, as has so frequently happened of late, corporate results of operation should be given to the real owners, not every month, not even twice a year, but only superficially in an abbreviated annual report. The stockholders are entitled to know the amount of gross business, the cost of conducting it, and especially the policy as respects depreciation and upkeep in full detail, in order that they may benefit by the intelligent judgment which competent experts will then speedily pass upon the real status as to net earnings. The United States Steel Corporation and the American Telephone Company are forthstanding examples of the value of such frank publicity, as a recommendation to the world at large of an investment; and any corporation which pursues the opposite course thereby invites and deserves distrust and suspicion. Yet it is unfortunately true that the policy of some of the charter-mongering states — Delaware, West Virginia, and the rest — has been to discourage, rather than to develop such full disclosure of the state of affairs. For private corporations, the present situation as concerns stockholders’ rights to information is most unsatisfactory.

Our experience with railroads is significant in this connection. They still deserve and require a greater measure of liberality in the matter of rates than has yet been granted by the Interstate Commerce Commission. But, this step once taken, they will be at last well on the road to a safe and stabilized investment for the great body of the people. It is clear already that the best of them are slowly assuming their rightful place in this regard, forging steadily ahead through the turbulence of speculation in so many other forms of enterprise. For speculation germinates in and thrives upon mystery. It is indubitable that this stabilization, even though it is yet on a subnormal plane, is largely the result of the complete publicity and standardization of railway accounts under Federal supervision. Several million investors may well be content to leave the management of their railroad possessions in the hands of others, knowing that, quite apart from the regulation of rates, this standardized publicity permits a scientific check, month by month, upon policy and results. How different is this from the manner in which even some of our nation-wide private industrial corporations do business all over the United States, cloaked and hooded like the despicable Ku Klux Klan. The clause of the Roosevelt New York Companies’ Act of 1900 which, as a penalty for failure to render detailed and current reports of operation, proposed to disqualify directors, making them ineligible for election for the period of a year, may be impracticable. Yet there may be the germ of an idea in the suggestion.

A brief address upon this subject recently, before the American Academy of Political Science, seems to have hit the crazy bone of a certain type of self-appointed spokesman of the quasi-public companies. The mere suggestion of governmental supervision, as applicable to them, in lieu of the vanishing rights of stockholders, was characterized — rather breathlessly, it seemed to me — as an attack upon ' all American business as honeycombed with dishonesty and greed; and all executive management as fraught with irresponsibility, indifference, and worse . . . using the traditions of a great institution of learning to spread an exaggerated impression of American business — the kind of propaganda on which demagoguery and communism feed.’ The soothing allegation that a beneficent economic revolution is occurring by reason of the widespread diffusion of corporate ownership is said to be ‘berated and rejected with a violence of invective and an indiscriminateness in denunciation that would make a Socialist orator blush for shame.’¹ Fortunately I am privileged to introduce a witness in my own defense. The Committee on Public Securities of the Investment Bankers’ Association of America reported in 1923 as follows: ‘When administered with the broadest power, and in a judicial manner, statewide regulation of public utilities has been conclusively proved, in the opinion of your committee, to afford the best guaranties which investors can have in this country for a maintenance of that integrity of investment necessary for a ready flow of money into the business.’ (Our italics present the concern of all the people — owners and consumers alike — in the matter.) For further discussion on the point, we may refer our critics to this distinguished body.

VII

What, then, is the present status of governmental supervision over publicutility companies — other than railroads, telephones, and telegraphs — in the United States? The fact is that nearly all the commonwealths have regulatory bodies, most of them, however, having jurisdiction only over such matters as rates for water, gas, and electric light and power. The present situation, therefore, as respects these operating companies is quite reassuring. What concerns the future is the hierarchies of holding companies, superposed one upon another — the piling of Pelion upon Ossa to the seventh heaven. This is provocative of grave concern, for it is in the heights that the real sources of power find place. The experience of the little Boothbay Harbor company is entirely typical. But, to nail the conclusion, take the Pine Bluff, Arkansas, local operating concern. This is controlled by the Arkansas Light and Power Company, which is a part of the Southern Light and Power Company of Delaware, also controlling the Mississippi Power and Light Company, the Louisiana Power Company, and the Louisiana Power and Light Company. And the whole congeries of them has been in turn acquired by the Southern Power and Light Company, this time incorporated in Maryland, which seems to be a part of the Electric Bond and Share Company of New York. Being the proud and happy possessor of some shares in this lastnamed corporation, I am thrilled with the sense of immediate participation in the local concerns of Pine Bluff, Arkansas! But that question has already been discussed from the point of view of the private owner. As concerns the public, it is self-evident that something besides superpower of electrical energy is entailed — and that is the growth of interstate corporations which are superpower systems of a different order. And for dealing with them we, as a people, have no machinery whatsoever.

Thus we are brought squarely to the perennial issue of Federal versus state authority. Whatever is to be done about the affairs, either of private corporations dealing in the necessaries of life in more than any one state in the Union, or with, let us say, the Associated Gas and Electric Company, which supplies ‘electricity and/or gas and/or water, to over 300,000 consumers, serving a total population estimated at approximately 2,000,000 in more than 900 communities in New York, Pennsylvania, Maryland, Massachusetts, Connecticut, Vermont, New Hampshire, Maine, Kentucky, Tennessee, and the city of Manila,’ must evidently be done on a larger basis than a single commonwealth affords. (In passing we may note that this Associated Gas and Electric Company has $36,600,000 in bonds and almost 500,000 nonvoting shares outstanding with the public. Control is apparently vested in 300,000 Class B shares, no par value.) An experiment is just now being forced upon the three states of Pennsylvania, New Jersey, and New York, concerning the creation of a Joint Giant Power Commission, by the growth of these great industrial units. Necessary they probably are! Sound, for aught that I know to the contrary, they are! But when one of them sprawls over the map from Aroostook County, Maine, to the Philippine Islands it is time to think what it means. And the contention that such concerns are already thoroughly controlled or supervised in the public interest, because forsooth each of their local operating companies is subject to existing state laws, would seem to be rather effectually disposed of. This is one of those rare cases where two and two do not make four, but something well over a dozen. It is inconceivable that joint giant power commissions should be set up by different groups of states, each group corresponding to the especial scope and extent of the particular corporation which it is intended to supervise. The answer, alas, seems to be always the same. If anything needs doing, there is but one agency to which to turn—exercise of the Federal power.

There are already at Washington three agencies which may conceivably become involved in these matters under discussion. But the simple, the logical, the inescapable conclusion is that superstate public-utility companies should be placed under the jurisdiction, either of the Interstate Commerce Commission, as the telephone and telegraph companies along with the railroads now stand, or else under an amplified Power Commission, similar to the one in the Department of the Interior which at present concerns itself with the licensing of water-power companies. Whether their rates need to be, or practically can be, thus regulated is another matter. But that their accounts ought to be formally standardized and made public is beyond all possible question.

What, then, about the private corporations, when direct responsibility for their management by the shareholders seems to be by way of evanescence? Whether this tendency be arrested or not, a greatly added measure of publicity ought by all possible means to be stimulated. Standardized accounting for all private forms of business, already so successful in the case of railroads, telephones, and telegraphs, is probably hopeless of expectation. The variety of circumstance and the multifarious exigencies of each and every kind of business would present to any administrative agency a task transcending human power. And yet certain norms might well be set up by some such body as the Federal Trade Commission. To take a pressing instance: the present impasse, so far as bringing intelligent public opinion to bear upon the anthracite coal strike, might never occur again, were the recommendations of the Federal Coal Commission of 1922 respecting standardization of coal-mine accounts actually in force. The policy of what has been aptly termed ‘induced cost accounting’ might well be elected as part of a general campaign of education by some Federal body. Let us hope it will not be one possessed, as the present Federal Trade Commission seems to be, with a sole and apparently overwhelming disposition to commit hara-kiri!

A mighty and preëminently important duty is imposed upon the Federal Government by the general conditions respecting corporations which thus seem to be headed toward a climax. Whether the means for a restoration of responsibility shall be suggestively educational or strictly regulatory must depend upon circumstances. Perhaps we should revive the question of Federal incorporation, so ably advocated by President Taft in his special message of 1911. This, or a Federal license system whereby permission to engage in interstate commerce entails compliance with certain standards as to corporate structure and publicity, deserves attentive consideration. The report of the committee of the British Ministry of Reconstruction of 1911,² dealing more specifically with trade associations than with corporations, was a response to somewhat the same great need which is making itself felt at this time in the United States.

VIII

I would not conclude with the advocacy of any particular plan. The first duty is to face the fact that there is something the matter. For a remedy I am groping as yet, like a child in the dark. I am conscious that things are not right. The house is not falling down — no fear of that! But there are queer little noises about, as of rats in the wall, or of borers in the timbers. I believe that the trouble has to do with the growing dissociation of ownership of property from responsibility for the manner in which it shall be put to use. And now is the time for action. It is not yet too late. Millions of our citizens made this first essay in thrift as a result of the great Liberty Loan campaigns during the war. It has been estimated that of the 14,400,000 stockholders in the United States no fewer than 3,400,000 were added within the three years following 1917. This betokens a great incursion into the field of investment by the common people — corporate possession being shared by those of moderate and small means with the wealthy class. The movement has been called ‘an economic revolution’ — ‘the passing of ownership from Wall Street to Main Street.’ What would be the effect were these newcomers — consumers, employees, or others — to discover some day that ownership and control had parted company, each going its way as ships that pass in the night? Suppose that the ownership of many industrial plants, great and small, continues to reside all through the countryside, but that the lodgment of the power of direction has shifted to the great financial centres. We have had experience, to our sorrow, with the old sectional divisions between the East and the West. Is there no smouldering spark in this matter of corporate control, which may some day flare up as a political issue of the first order? I do not look to Sentinels of the Republic or to anti-syndicalist laws for the ultimate safeguarding of our institutions. Our security, in the last instance, must rest upon the ever-widcr prevalence of what Lord Bacon held to be ‘clear and round dealing among men!’ With that assured, we may quite confidently leave all the rest to take care of itself.