CHAPTER XX

ABUSES AND WEAKNESSES OF THE AMERICAN SYSTEM

DURING the past three decades many laws have been enacted by congress and the state legislatures that place restrictions upon the freedom of action of business ownership organizations. The state of Ohio was one of the first to enter the lists against big business when it brought suit against the Standard Oil Company of Ohio, to force dissolution of the Standard Oil Trust, of 1882. Within a comparatively short time other states followed this lead by enacting anti-trust legislation, and even the federal congress was prevailed upon to pass the Sherman Anti-Trust Act. From then on there has been a continual fight raging in our legislative bodies to correct abuses and to combat evils that have crept into the ownership organization. At times this has taken the form of investigations by committees and bureaus whose reports have been highly enlightening. Among them we find the 1900 report of the United States Industrial Commission, consisting of some 19 volumes; that of the Hughes' Commission of the state of New York which laid bare the connections of the great insurance companies with big business in the matter of finance and control; the voluminous reports of the Pujo Commission concerning the so-called "Money Trust "; the many reports of the United States Bureau of Corporations, and more recently those of the Federal Trade Commission. Prosecutions have also been numerous both in the state and the federal courts. Their reports are filled with decisions condemning in no doubtful way certain methods

and practices that have been employed by our large and small business organizations.

These events and acts permit of but one interpretation, namely, that there is something wrong in our system of ownership organization. It does not conform in full to our sense of business ethics and morals. It is experiencing difficulty in adjusting a new order of organization to our ideas of propriety as dictated by our laws and customs. Consequently there is ever a tendency to violate the existing laws. Big business units have been perhaps somewhat more culpable in this than have the smaller ones. The former through their control of our basic industries exercise a potent influence upon our daily lives and upon business in general. They are constantly in the public eye. The errors that they commit are seized upon by the publicist and are prominently displayed in newspapers and periodicals. For that reason, but not without some justification, has the general public come to view our big business organizations from a critical angle.

What then, are some of the acts and abuses that have called forth this deluge of criticism?

ACTS AND ABUSES LEADING TO CRITICISM

Generally speaking, the criticism directed against the ownership organization centers upon six things, namely: (1) The methods of administration and control; (2) the methods and practices of promotion and finance; (3) financial management; (4) speculation; (5) unfair methods of competition; and (6) monopolies and combinations in restraint of trade.

1. Administrative Abuses. From the standpoint of administration and control business has laid itself open to criticism, not so much because of the direct violations of law, but rather because the law has been so lax that it has permitted pernicious practices and abuses to spring up and

has countenanced and tolerated them until public opinion has revolted. While there are many of these laxities of law, a few have stood out more prominently than others. Since most of them have been pointed out here and there in the preceding chapters it will suffice at this point merely to bring them together in the form of a summary.

(a) The ease with which stock may be transferred has made it possible for the criminally inclined manipulator to organize a company which he knows to be unsound, to reserve for himself a large block of the stock and to dispose of his interest at a good profit when the propitious moment arrives. In this way those who have organized the company, and upon whom the responsibility for its conduct should rest, are enabled to slip out before the collapse

comes.

(b) The small holdings required of directors have also caused criticism. Through dummy, or controlled directors a small group of stockholders may retain control over the affairs of a large corporation. They can then cause it to be managed for their own personal profit to the detriment of the whole body of stockholders. There may be some advantage in this in so far as it will permit of greater freedom in hiring executive and administrative ability. It is, nevertheless, objectionable because the laws in most states are not such as to hold the directors both civilly and criminally responsible for their acts. The remedy, then, does not appear to be in the direction of more stringent requirements as to qualifications of directors. They must be made responsible to stockholders and creditors for their acts.

(c) The inadequate representation of minorities is another point upon which criticism centers. Under the ordinary system of voting those who can secure by ownership or proxy the right to vote 51 per cent of the voting stock have the right to fill all places on the board of directors.

They may in this way exclude the minority from voicing its opinion or being represented on the board of control. Such a condition has frequently led to factional fights among the stockholders which have been carried to the highest courts. Often enough, in such cases, has the minority been sustained in its claim of mismanagement. The best remedy is to assure the minority of adequate proportional representation. To this end many states have adopted legislation which in some cases prescribes, and in others permits of, the use of the cumulative method of voting. Other states, however, have let this abuse go unchecked by remedial laws. Under this condition the incorporators may choose the practice that is to prevail.

(d) The privilege of proxy has also been abused. Strong, well-organized minorities owning from 25 to 30 per cent of the voting stock have found it easy to maintain themselves in control of the corporation for long periods of years through the use of long-time proxies. Here also, several states have taken action limiting the life of a proxy to a single election, but they are very few in number.

(e) The large number of stockholders and their remoteness from the seat of activity of the enterprise in which they are interested is another contributing influence. The tens of thousands of stockholders of our larger corporations are scattered throughout the forty-eight states and many foreign countries. It is impossible for them to come together at stated intervals to discuss the affairs of the businesses. Many of them have no interest in the management and do not care to assume the burden of active participation in the corporate affairs. Many of them hold the stock for speculative purposes solely, expecting to make a profit, not from dividends, but from a resale of the stock. Others, while they are bona-fide investors who hold stock for the sake of dividends, are perfectly content to let those who have the power control the policies of the corporation

and give their proxies freely or abstain entirely from voting. These circumstances frequently lead to abuses perpetrated by a small, well-organized group of stockholders, whereby such a group seeks gain, irrespective of the effect of their acts upon the great body of more or less disinterested stockholders.

(f) Furthermore, in most of the states there are no definite responsibilities placed upon officers and directors. In but a very few are they made both civilly and criminally liable for infractions of the law. And even where there are such laws, the lack of interest, coupled with an amazing ignorance of their lawful rights on the part of the stockholders, permits the criminally inclined to defraud them without being brought to justice for their misdeeds. 2. Abuses Arising out of Methods of Promoting and Financing Companies. The manner in which most of our larger business companies have been promoted and financed has been, and still is, the cause of much justifiable criticism. Legislatures have erected few, if any, safeguards against the wild extravagance and unsound practices that have characterized this feature of the formation and operation of our corporations in general. Many of them, organized since 1890, have been highly speculative ventures that, from the beginning, had little chance of success. They floundered along for a few brief years, attempting through speculation and other questionable practices to maintain themselves, only in the end to be reorganized or to become bankrupts and to disappear. Unwise promotion, poor, and sometimes even fraudulent, financing and orgies of speculation have marked their lives. Many of these abuses have been brought to light through the reports of government bureaus, special investigation committees, court proceedings and accounts carried in financial publications. It is quite out of the question to treat them in full in this work, for they are the