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made directors in order to complete the number prescribed in the charter, or are the representatives of great financial interests, and often of competing interests. Directors of this latter sort are not primarily concerned with the management of a corporation in the interests of its stockholders and bondholders. They are directors for the purpose of guarding special interests, and in many cases for the purpose of preventing "competition" from becoming anything more active than an armed peace.

In many cases the real direction of a corporation's policies is in the hands of an "executive committee " or "finance committee " of three or five directors representing the person or persons in actual control of the corporation.

Advantages of the Corporation as a Form of Business Organization. — From the point of view of the business man the corporation presents decided advantages over the partnership for all undertakings of considerable size. Some of its points of superiority are: (1) Stockholders usually have no personal liability for the corporation's obligations except so far as the full par value of their stockholdings has not been paid up.1 (2) The relative permanence and stability of the corporation are of decided advantage, especially in undertakings requiring large investments of capital in relatively fixed and permanent forms. (3) The concentration of executive power in the hands of directors and officers leads to efficiency in management. (4) The transferability of corporation securities makes it possible for stockholders. to enter or leave the undertaking at pleasure. (5) The division of the securities into small units and into different grades and classes affords opportunities to all kinds of investors, the small and the large, the conservative and the venturesome. (6) All of the advantages named make it easier for the corporation to attract and to use efficiently large amounts of capital, furnished by many different investors.

Social Aspects of the Growth of Corporations.-That corporations do possess desirable features, from the point of view of

1 Exception should be made of banking and insurance corporations, in the case of which "double liability" on the part of the stockholders is common. A few states impose some measure of personal liability upon the stockholders of all corporations organized under their laws.

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business interests, is a fact clearly evidenced by the unprecedented growth of this form of business organization. In the main, efficiency for business purposes, for money making, means efficiency from the social point of view, productive efficiency, also. But, nevertheless, the two viewpoints are not identical, and what is desirable from one point of view is not always desirable from the other point of view.

The gap between money making and service to society (never quite identical things) is distinctly widened when those in control of a corporation's policies subordinate the profits to be obtained by the sale of its products to the profits to be obtained by speculation in its securities. Many of our greatest corporations are directed by men to whom fluctuations in capital values (as represented in the prices of securities) are a much more important source of personal income than are the net earnings of such corporations. The payment of unearned dividends, the nonpayment of earned dividends, the direction of a corporation's policy for the benefit of the holders of one kind of security among the different ones issued by the corporation, the effecting of corporate combinations and reorganizations that will affect the stock exchange rather than the produce market, these are some of the more obvious results of the unfortunate relation between corporation management and speculation in corporation securities.

It should also be noted in this connection that the growth of corporations is bringing with it a subtle but very significant change in the nature of the institution of private property. So far as a large and increasing proportion of productive wealth is concerned, we are losing that direct relation of ownership between men and goods which Arthur Young had in mind when he said, "The magic of property turns sand into gold." We often have, instead, several layers of corporation securities interposed between the ultimate owners and the ultimate objects of ownership. The effect of this will undoubtedly be to bring about the more thorough domination of business principles in the business world. Sentiment, the honored traditions of long-established firms, the "pride of ownership," the joy of workmanship (which

may be felt by the employer who turns out a good product, as well as by the workman) are bound to yield yet more completely to the sway of the cold logic of corporation accounts and stock. market quotations. The adequacy of purely business principles as the foundation of our economic life will be tested more thoroughly under the corporation form of organization than ever before.

Trusts. A distinctive feature of the economic development of the past thirty years has been the combination of individual corporations into larger concerns, or trusts. The "trust," in the technical sense, involved either giving a board of trustees the absolute control of the actual properties of the different concerns in the combination, or what amounted to the same thing, assigning the stock of each corporation, with its voting power, to them in exchange for "trust certificates," on which dividends were paid. The Standard Oil Trust of 1882 was the first combination of this kind, but it was speedily followed by several others. In 1890, in a case brought by the state of New York against the sugar trust, the trust agreement was held to be illegal under common law. Corporate combinations were not destroyed by this decision. They changed, however, to a more definitely coherent form, that in which a single great corporation dominates the consolidation.

In most cases, this corporation, which is usually organized for the purpose, does not own the actual plants of the various concerns in the combination, but simply owns all or a majority of the stock of each. It is accordingly called a "holding company." The holding company exchanges its own securities for the securities of constituent companies, or, when necessary, it buys the securities of the constituent companies with funds secured from the sale of its own securities, sometimes by the sale of bonds secured by the pledge of the securities of constituent companies as collateral. Not only in industrial consolidations,1 but also in railway and electric railroad mergers has the holding company device become important.

1 A very complete list of "trusts," prepared by Mr. Byron W. Holt for the World Almanac (1908), contains the names of about 250 industrial combinations, most of which are holding companies.

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From the point of view of business organization the holding company is simply an extension of the principle of the corporation. The holding company needs for purposes of control only a majority interest in the stocks of its subsidiary corporations. Various holding companies may in turn be combined by means of one larger holding company, and the process may, and does, go even further. An individual capitalist may, by an investment of $1,000,000, for example, control a holding company with a stock issue of $2,000,000, which in turn may control corporations with $4,000,000 of stock outstanding, and some of these last may in their turn be holding companies. The result is a tremendous concentration of industrial and financial power, with the minimum of liability. The uncontrolled use of the holding company device leads to neglect of the interests of the minority stockholders in the various corporations concerned; to difficulty in fixing the legal responsibility for corporate misdeeds; to an undesirable complexity in the economic and legal relations of the holders of securities in the different corporations, and to the subordination of industrial to speculative ends.

The "trust problem," however, has attracted more attention as a problem of monopoly than as a problem of business organization. The problem of monopoly will be considered in another chapter. Here it is sufficient to note that combination and monopoly are not identical things, that we may have either one without the other. It is true, however, that the movement toward combination originated as one manifestation of the efforts of men engaged in competitive undertakings to escape from the restraints imposed upon them by the fact of competition. Price agreements, selling bureaus, division of territory, limitation of output, pooling, etc., are other forms of the same general effort.

The specific motives usually mentioned as the most important causes of corporate combinations are (1) the greater economy of the large-scale business; (2) the elimination of purely competitive expenses (some kinds of advertising, for example); (3) the

It is assumed, for convenience, that the stock in each case is worth par and that the ownership of half of it will give substantial control. In the case of industrial combinations ownership of all the stock of the subsidiary companies by the holding company is not uncommon.

power to limit output and control price. The first of these factors suggests the difficult question of the most profitable size of the business unit. Without discussing this point in detail in this connection we may note that the significant thing is the most economical size of the industrial plant rather than of the business unit itself. Some of our present-day business units are so large that they operate a number of duplicate plants. To that extent, at least, they are larger than is necessary to secure maximum technical efficiency. Whether competitive expenses and competitive prices are eliminated by combination depends on whether the combination has any real basis of monopoly power over and above the mere fact of combination, which, taken alone, can give at most only a temporary monopoly.

It is plain, however, that if any or all of these three classes of advantages do exist in the case of a particular combination, the earning power of the combination will be greater than the total earning power of the separate concerns before consolidation, a difference which will be reflected in the value of the securities of the holding company. It is this increment in capital value, due to the real or expected advantages of consolidation, that has been the chief cause of such combinations. The organization of trusts has in many cases been effected by professional "promoters," whose connection with an undertaking does not continue any longer than is necessary in order to secure the profits of consolidation. A few great trusts like those which dominate in the oil, sugar, steel, and tobacco industries have been conspicuously successful in a business way. Many others were "made to sell"; that is, were organized only in order that profits might be gained through the sale of their securities, and have been weighted down by a capitalization not justified by their actual earning capacity. Some of these have already been reorganized, with diminished capitalization; others, possibly, only await the test of a prolonged period of financial depression.

Anti-trust Laws. Most states have statutes and some have constitutional provisions against "combinations in restraint of trade." These are aimed primarily against the large corporations of the kind described, although if strictly construed they

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