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The Relations of I'orporate Shareholders to the Management,
Legislation, and the Public. — No. 1.
THE LONG-SUFFERING SHAREHOLDER.
RAILROAD DIRECTORIAL MISMANAGEMENT,
GOVERNMENTAL OPPRESSION.
By HENRY WOOD,
AUTHOR OF "NATURAL LAW tN THE BUSINESS WORLD," AND
VARIOUS ECONOMIC AND ETHICAL ESSAYS.
January, 1889.
BOSTON ;
W. B. Clarke & Co.
Price, per doz., 50 cts.; per 100, ^3.50.
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THE LONG-SUFFERING SHAREHOLDER.
Looked at from the outside, every railway or other business cor¬
poration is a unit. This fact is realized in all its external rela¬
tions, whether with the general public, with legislation, or in its
commercial transactions. Like the human body, though it has
many members, it has but one will, one head, one voice. Corpo¬
rations are indispensable to the present highly organized condition
of society, for without them science, invention, art, and production
would fail to find wide and general expression, and material, com¬
mercial, and even intellectual progress would be turned backwards.
This neces-ary form of organization, outwardly but one. when
viewed from within, has a variety of elements. Theoretically, all
these factors are active, either directly or by representation. The
directorial board of a corporation are but the trustees or servants
to do its work.
Turning our attention from the ideal to the actual corporation
(especially to railway organizations to which attention is here
chiefly directed), we find an aggregation of abuses, unscrupulous-
ness, and dishonesty that is startling. The official mismanage¬
ment of corporate business is the deadly Upas of the present era,
and it is extending its poisonous influences in every direction. It
has become not only common, but subtle, plausible, and insinuating
so as to obscure, and almost eclipse axiomatic moral principles
which are older than the Decalogue. The public conscience is so
accustomed to directorial manipulation, and skilful and prolific
ingenuity on the part of railway officials, that as a matter of
course they are almost expected. To be on the " inside " is almost
as good as a fortune assured. Unscrupulous management is often
regarded only as " shrewd financieiing," and even as "brilliant"
bo long as it escapes technical and legal cogniz im e and punisii-
meut. Instead of earnest condemnation from the public press, it
often calls out criticism only of a flippant or facetious character.
Its direct consequences may be seen in great congested, unearned
fortunes, in a lax public conscience, in the universal distrust with
which the world regards the average American railway manage¬
ment, and in the transformation of a legitimate stock-investment
business into one of a purely gambling character. It furnishes
the text and vantage-ground of every anarchist, socialist, and
would-be destroyer of our present social order, and so far as
legitimate investment is concerned, it has nearly " killed the goose
which lays the golden egg." It seçms strange that both legisla-
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tion and public opinion liave so lightly regarded these great com¬
mercial evils, and while perfectly aware of their magnitude, have
taken no earnest measures for their abatement. The direct suf¬
ferers are the hundreds of thousands of shareholders * and owners
of other securities, who have furnished the seven or eight billions
of dollars which have created the great arteries of American com¬
merce, and without which the material resources of the nation
would be but infantile in comparison with the present reality.
The great majority of shareholders have no practical way of mak¬
ing their influence felt in the conduct of the business of their
several corporations, and are largely the victims of a false system
which is strongly intrenched, and of rapid growth.
With all due recognition of numerous and honorable exceptions
in the application of these strictures, the fact remains that the
average railway management is autocratic, irresponsible, and often
definitely dishonest in its relations towards its shareholders. In¬
vestors are made to bleed at every pore, while their pauedo
trustees, by means of their earlier and superior information, fatten
equiilly well on corporate adversity or prosperity. Between the
triple combination of official dishonesty, the shackles of the inter¬
state commerce law, and hostile State legislation, the interests of
the shareholder are ground to powder.
DIRECTORIAL MISMANAGEMENT. 1
In the above order, let us first specify some of the ways in which
the investor suffers from directorial chicanery.
First. By manipulation in the stock market, by means of com¬
bination or conspiracy among the managers to the unfair dis¬
advantage of the other proprietors.
Second. By withholding regular reports, statements, and in¬
formation, for personal advantage, which usurpation the common
law does not take cogniz¡ance of.
Third. By complicated systems of book-keeping, which though
not technically fraudulent, are misleading and deceptive.
Fourth. By directorial interest in other railways or corpora¬
tions, with which consolidations, the absorption of branch lines,
leases, or special running arrangements are made, to the detriment
of common stockholders.
Fifth. By official interest in railway ' ' construction companies "
and fast freight lines, for personal advantage, to the disadvantage
of the corporation.
Sixth. By commissions and profits on, or an interest in,
purchases of material for the use of the company.
If the early and peculiar knowledge incidental to the position of
* Their numbers range from a few hundred in some lines, up to ten or fifteen
thousand each in a few of the great Western systems.
the management is used as a basis for manipulation, to the detri¬
ment of the stockholder, it is as truly stealing, from a moral point
of view, as it would be in case a portion of the rolliug stock or
track were purloined. Immaterial possessions are as intrin.sic,
and as truly property, as are those assets which can be seen and
handled. The public conscience should be educated up to the
point of calling these actions by their right names, and the lack of
such explicitness has prompted proceedings, many of which are
criminal in character, and which should be so classed in law and
fact.
POSSIBLE REMEDIES FOR DIRECTORIAL MISMANAGEMENT.
After this general outline of the abuses of corporate manage¬
ment, a few brief suggestions as to possible remedies may be proper.
It will be difflculf to find any complete antidote for such deep-rooted
evils through the means of practical legislation, but among promis¬
ing enactments that are worth a trial may be included —
First. The compulsor}' issuing of monthly reports in a uniform
manner, and after a prescribed formula, the correctness of which
should be affirmed by the oath of one or more directors, adding
thereto such explanatory matter as the management might deem
necessary.
Second. A periodical audit by outside governmental examiners
or professional accountants, duly qualified and sworn for this
special service, on some plan similar to that used in the case of
national banks.
Third. Construe as bribery the receiving of any commissions
or presents by any auditor, purchasing agent, or official, which are
given because of his official position.
Fourth. That it shall be illegal, with heavy penalties, for any
corporate official or manager to buy the stock of his company,
except for actual investment ; nor shall he sell the same unless he
be the actual owner of the amount sold, and makes a delivery of
it ; and he shall neither buy nor sell except after prescribed public
notice.
Fiflh Require affidavits at stated intervals from each official
that he has made no speculative sales nor purchases, indirectly, of
the stock of his corporation, and that he has no interest in any
such transactions made by or ihrough uny third parties.
It may be objected that the last two proposed measures do not
harmonize with the principles of laissez faire, but a sound political
economy teaches that individual freedom must give way to collec¬
tive freedom, and that the will of society is paramount to personal
will. Managers would be restricted in such a way only in a single
direction, which is'the vital point to be guarded, but elsewhere
they would have perfect liberty. If the adoption of the last two
measures were found impracticable, the single requirement of
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monthly sworn statements would strike a telling blow at the abuses
t f officiai control. Adequate salaries should be paid for all official
services actually rendered, which would remove every plausible
excuse on the part of the management for any predatory invasion
of the shareholders' interests. It is time that the most necessary
and honorable business of building and operating a railroad should
be otherwise looked upon than as a " scheme," or even a game in
which the management play with loaded dice.
The systematic wrecking and reorganizing of railways in which
the interests of the shareholder are uniformly sacrificed forms,
perhaps, the darkest stain upon American commercial honor.
INFLUENCE OF THE INTERSTATE COMMERCE LAW.
It is now in order briefly to examine the influence of the Inter¬
state Commerce Law upon the interests of the shareholder This
law is based upon that clause in the Constitution which includes,
among the duties of Congress, the regulation of commerce between
the States. The plain intention of the framers of the Constitu¬
tion was to forever prevent, by any State, the erection of any
customs tariffs, so that State lines should be no obstruction to the
free currents of commerce. The idea of regulating, directly, the
market price for carrying freight or passengers probably never
entered their minds. The basis for a national legislative interfer¬
ence with the legitimate, free, competitive business of common
cari'iers, is therefore strained and unnatural, As the courts
have sanctioned such regulation, however, their decision must be
accepted. It is undoubtedly true that the peculiar public senti¬
ment which inspired this law, was mainly prompted by the glaring
directorial abuses already enumerated, but the aim was wide of
the mark, for when the charge was fired, the game that came down
was the shareholder. The knowledge of the practical dividend-
destroying qualities of the law, coming earliest to the management,
enabled them to "short" their properties, and thus actually to
fatten on the losses of the common investor.
The object of government and legislation is not to confiscate,
but to protect property. The Interstate law, through the long and
short haul clause, and the prohibition of pooling, accomplishes the
former. The right to arbitrarily regulate the rates for freight or
passenger service, and thus place not only the earnings but the
absolute capital (which derives its entire value from expected
earnings) at the mercy of a possible unintelligent majority of
Congress, is the most radical and (jangerous legislative experiment
of our national history. It is an assumption of legal authority
which has no moral basis. From a correct fthical standpoint, it
is as heinous for an organized government, through legislation, to
take private property without compensation, as for an armed body
of freebooters to do the same in a less roundabout way. With a
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majority of legislators this may be unwittingly done, but the fact
remains. The stiff unscientific hand of legislation undertakes to
regulate prices which inherently have in them the elements of self-
regulation. As well interfere with, or make uniform the price of
wheat or potatoes. Exception will be taken that railways are
quasi-public institutions, and that by their charters the}- have been
granted the right of eminent domain, all of which is true, but the
sole reason for granting that right was the public convenience, and
the shareholder paid full value for every square foot of ground
taken or damaged.
AXL PRICES SELF-REGULATIVE.
Two ever-present natural principles should regulate the price of
railway service, as of every other salable commodity: (1) direct
competition, and (2) the invariable fact that demand falls off the
moment that prices are placed above the normal point. The latter
principle, even in the entire absence of the former, hedges in the
strongest corporation. The greatest profit in the long run is
always realized at normal (or fair) rather than at exorbitant
rates, popular opinion to the contrary notwithstanding.
As a proof, witness the steady decline during the last twenty
years in actual rates for railway service, as they have kept pace
with the normal (or those prices for which, owing to continually
improving appliances, it could be rendered) before there was any
legislation on the subject. A reduction of ten per cem in rates
often brings an increase of twenty-five or even fifty per cent in
business.
Governmental regulation sounds well, but the real, not the ideal
government, may consist of a bare majority of unexpert and uncon¬
scientious politicians who happen to compose a given Congress.
The material and financial conditions of no two of the hundreds
of American railways are alike, and while the natural and elastic
law of supply and demand can adjust itself to them all, it is
impossible for legislative law to accomplish this, as it has no flexi¬
bility.
The Interstate long and short haul clause is economically irra¬
tional, and destructive of investors' interests, because all price
making is beyond the province of legislation.
AUTOCRATIC POWER OF THE COMMISSIONERS.
Can any other law be named to which the enforcement, or per¬
mission to violate, is left optional in each case with a board of
extra-judicial commissioners? This law vests in a few men a
power more than autocratic. The duty of the judiciary is to
interpret and to enforce law, but this commission has the power
to settle questions involving millions, as mere problems of expedi-
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ency, and in which no principle of right or wrong is involved.
This Interstate law has already caused a shrinkage of hundreds of
millions in the bona-fid'' investments of American shareholders,
and all without any corresponding advantage to shippers It is
" a losing game" all around. The shipper, during a general busi¬
ness depression caused by the shrinkage in railway values, suffers
in common with all other classes. If, however, shippers were ben¬
efited, it would be at the expense of justice. That section of the
law which prohibits pooling will force further and greater consoli¬
dation, as the only alternative to universal bankruptcy. Business
can only flourish under free conditions, and the true province of
legislation is to enforce contracts which have been voluntarily
entered into.
ONE USEFUL PROVISION.
A section of evident utility in the Interstate law is that which
prohibits discrimination under like circumstances and conditions.
This section, unlike the two before examined, is founded on a
moral principle. In the main, the Interstate law is the embodied
expression of Granger, socialistic, and demagogic prejudice
against vested interests as represented in the railway corporations
of the nation. While directorial manipulation and chicanery have
greatly intensified and made ostensibly reasonable this prejudice,
it is at the same time blind in its aim, and unjustifiable in its
tyrannical antagonism to the rights and privileges of the share¬
holder.
LONG AND SHORT HAULS.
Abnormally cheap long hauls, under free conditions, created a
vast business, which is destroyed by the pro rata shackles of the
' long and short haul clause." In many cases, if the roads are
forbidden to do it at a somewhat less price, proportionatel}', than
is charged for shorter hauls, the business is lost. A railway must
maintain its facilities and fixed charges in either event, and there
fore the former cheap long hauls were almost so much clear gain
to the ordinary revenues of the road. With this source of income
cut off, the deficiency in the long run must be made up by higher
way rates than were necessary before the freedom of railway
transportation was taken away. The Canadian Pacific line, being
free from the incubus of artificial restraint, is able to command an
immense through business that would naturally be done by
American lines, which fact in itself forms a striking commentary
on the wisdom of " long and short haul " repression.
Bates for railway service in the United States when compared
with those demanded in Europe are found to be astonishingly low,
notwithstanding the fact that employees' wages are more than
double the European average. The rate charged per ton per mile
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by the great trunk lines running from Chicago to the Atlantic sea¬
board in the year 1887 was only a little over seven tenths of one
cent, or less than one quarter of the rates of the year 1865. On
the great systems west, northwest, and southwest of Chicago the
charge in 1887 was on an average about one cent, and this, too,
was within a small fraction of one quarter of the average charge for
similar service in 1865.
STATE LEGISLATION.
Restrictive railway legislation, as expressed in the recent enact¬
ments of several Western States, seems likely to prove the " last
straw " to the shareholder who has investments in the lines of those
localities. Not content with the appointment of commissioners
whose duty shall be to fairly and carefully conserve the interests
of both the public and the roads, they construct ready-made tariffs,
fix unreasonable maximum prices, and shackle what little commer¬
cial freedom has been spared by the national enactments. Take
for illustration the case of a single State. The railway mileage of
Kansas, b}' means of outside capital, has been doubled in the last
three years, and the following is the result : About one third of this
mileage was operated at a loss of over one million dollars. One half
of the whole failed to earn enough to meet interest charges in full,
and less than one fourth of the full mileage returned anything to
the stockholders. Those who have furnished the means to build
over six thousand miles of roads in that State get no returns for
their investment. The constituencj' of the legislators of States
like Iowa and Kansas, not having invested in their local lines of
transportation, conclude that the non-resident shareholder is fair
game for plucking. To the Granger mind the Eastern shareholder
is a "bloated bondholder," who needs a little wholesome discipline.
GENERAL BAD RESULTS.
The result of the repressive policy, national and State, while
disastrous to the dividend-earning capacity of the railways, at the
same time will prove morally and financially detrimental to the
whole country. "When one member suffers all suffer." The
track, road-bed, and rolling-stock of the bankrupt, insolvent, and
non-dividend earning lines will necessarily deteriorate, and the
public service become indifferent. Railway enterprise, responsi¬
bility, and reliability will become impaired, unless the restrictive
policy now so confidently pursued is relaxed to an important
degree.
Practically, the average shareholder in a great railway corpora¬
tion has no influence whatever in shaping its policy, even if he
enact the farce of voting by self or proxy at its annual election.
Is there, then, any remedy for the abuses which have been so harm-
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ful to the interests of investors, and which so seriously menace
their future? When the government not only fails to prot ct the
shareholder from the wiles of the directorial board, but also, under
forms of law. uses its own power tyrannically, is it not time for
shareholders to organize, and make some effort to bring influences
to bear to reform existing evils?
shareholders' ASSOCtATIONS.
It seems probable that a thoroughlj- organized working associa¬
tion of investors and stockholders in each important city might
prove to be an exceedingly useful institution. Such organizations,
by the employment of able committees on legal prosecution, legis¬
lation, economic literature, and in any ether needed departments,
might successfully grapple with abuses against which the individ¬
ual is powerless. While advancing the interest of its own mem¬
bers, it also could greatly aid the general public in rooting out
directorial manipulation and mismanagement, and in an important
degree promote needed economic legislation, and also lend its aid
in securing the repeal of that already in force which is harmful and
superfluous. The moral as well as the legal power which such per¬
manent organizations might wield is very important.
HENEY WOOD.
Koxbuky, Mass., January, 1889.
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