CHAPTER LXXIV.
NEEDED PUBLICITY AND REFORM IN CORPORATIONS.
Years ago I saw the inevitable end of the methods of some of the
unscrupulous managers and manipulators of corporations, and began to
agitate the employment of certified public accountants to examine into,
and report to the stockholders, the true condition of the companies
involved. Had my suggestions been adopted there would have been little
cause for the recent investigation by the government officials, as the
reform now sought would have been accomplished long before the present
stringency of money became a disturbing element all over the world, and
would not have led to the semi-panicky conditions which prevailed so
disastrously in 1907. An address on “Publicity and Reform,” which I
delivered before the Wharton School of Finance, University of
Pennsylvania, in April, 1906, includes my urgent adoption of the policy
I have referred to, and reads as follows:
We live in a progressive age, and we are at present passing through a
period of salutary business reform. This reform means improvement, and
business men of all kinds should help and not retard it. The banking,
railway, and insurance communities should, in particular, do all they
can to promote it and invite the fullest publicity as to their
transactions and methods of doing business. In this connection the
opposition developed in the New York Legislature to the investigation of
the banks was a mistake of judgment, because it was calculated to excite
distrust, whereas willingness to submit to thorough investigation would
allay it.
This opposition drew more public attention to the agitation for a
general bank department examination than would otherwise have been
attracted to it, and the unwillingness to submit to it suggested that
there was a screw loose, or something to conceal in connection with some
of the State banks; and that they were therefore vulnerable to attack,
or at least open to criticism. This suspicion those concerned should
have avoided by not only boldly facing the legislative music, but
inviting it and leaving everything open and above board. Corporations
and banking and mercantile firms that become at all objects of suspicion
should, in their own interests, speedily clear themselves, by inviting
the fullest examination and publicity. Unsoundness and irregularity, if
such existed, would thus be exposed and weeded out, instead of being
nursed in secret, and so doing harm and impairing confidence in
corporations and firms perfectly sound and regular in their methods and
practices. The sound concerns would stand better than ever after passing
through this ordeal of publicity. The New York Legislature, as well as
the Legislatures of the other States, should respond to the popular
agitation for publicity by passing laws requiring all corporations,
including banks and trust companies, to make at least semi-annual
reports of their condition, certified to by registered public
accountants, with power invested in the State Superintendents to order
special examinations by such accountants, at any time, when deemed
necessary; that is, whenever they were suspected of being unsound or
irregular in their business methods. This should be done for the
protection of others as well as to clear them of suspicion and restore
their credit, if found to be sound and straight. Only the insolvent and
the crooked would have anything to fear from this wholesome publicity.
In this way disaster might be averted and impaired confidence promptly
restored. I lay stress upon the employment of skilled accountants
because the certified results of their examinations would be accepted as
conclusive of the actual conditions being as they stated or described.
They would speak with authority. It should be made a felony for an
accountant to make a false or misleading report, and he should ever
after be disqualified from practising.
To meet the growing demand for them, every college and university should
have a department for the special training of accountants, who on
graduating should receive a diploma or degree, as in the medical or
legal profession. Already the position held by certified accountants is
high, but it should be raised still more by the action of the
universities and colleges. Some of these have established departments
for accountants, where the students undergo thorough training by men who
have had practical experience in the profession, but all institutions of
learning ought to have them and maintain them in a high state of
efficiency in view of their importance to the business community. The
opposition to publicity shown by the New York State banking interest, as
represented in the Legislature, where it has choked off probing, has
thereby aroused fresh suspicions and much adverse criticism. It is not
surprising that many are led to suspect that there is much concealed
that ought to be revealed.
The strong desire for secrecy in the management of corporations,
especially with life insurance companies, is obviously in defiance of
public sentiment, and the Legislature should now make the house-cleaning
thorough while it is about it. If it does less it will fail in its duty.
It is indeed very surprising, under the circumstances, that the officers
and trustees of the great life insurance companies should have supposed
that anything short of complete cleansing and purification would satisfy
their policyholders and the public.
The bankers of the country are, more or less, intimately concerned in
seeing this Augean insurance stable thoroughly cleaned out, for, unless
it is, distrust will linger, and the life insurance taint will, more or
less, continue to extend to the banks, bankers, bond dealers, and trust
companies, with which the life insurance companies necessarily have to
do business.
For the banking interests to virtually ignore the past, and say to the
life insurance companies, “Go, and sin no more,” would be
pusillanimously evading the requirements of the situation. The cloud
that drifted over Wall Street from the insurance investigation must be
entirely dispersed by the fullest investigation and publicity and the
establishment of a new regime in insurance management and its banking
methods and affiliations.
It is the duty of life insurance trustees to co-operate to this end, and
for them to refuse to do so is to imply consciousness of their own
inability to stand the searching ordeal. If such there be, owing to
their purchases or sales of securities, in connection with their
respective companies, or any other doings that cannot bear the light or
are open to criticism, they should be ventilated and exposed without
fear or favor.
The efforts to smother further life insurance investigation, which had
their counterpart in the opposition to the proposed banking department
investigation, should be frowned down by public opinion, both in the
interests of morality and good business practices. The banks and the
banker should, like Caesar’s wife, be above suspicion, and not less so
the life insurance manager and trustee.
Turning to the railways, we find the need of stricter laws in matters
that favor a few at the expense of the many, as, for instance, in the
giving of rebates. To prevent these, not a mere fine, which can be
easily paid, should be imposed, but the offence should be made a
misdemeanor, punishable with imprisonment. Railway officials would then,
with the danger of an indictment and a term in prison before them,
hesitate to violate the law. For their own reputation, as well as for
the sake of their families, they would be likely to avoid that secret
and unlawful rate-cutting, disguised by the payment of rebates, which
has done so much in the past to foster unholy monopolies and crush
competition to the ruin of thousands.
In the lime-light of publicity the irregular rebate practices of the
railways, for the benefit of large and favored shippers, would be
impossible; and equally so would have been the go-as-you-please and
extravagant management of the life insurance companies as revealed by
the insurance investigation. Under the new order of things, regulated by
stricter laws, it should be made impossible for these irregularities
ever to occur. The death-knell should also be sounded by these stricter
laws and reforms of much of the “graft” that has been epidemic in
political and business life. Publicity of accounts would be a protection
to all solvent concerns and expose and eliminate the unsound and the
fraudulent that would otherwise be a menace to them, and it should be
welcomed by all who have nothing to fear from such publicity.
We are passing through a reform—yea, a revolutionary period in business
affairs. But good will come out of it, for with our improved business
methods will come a higher sense of responsibility and a keener
perception of duty, which cannot fail to inspire correspondingly greater
confidence and produce more certain results. We shall thus have more
conservatism in business and fewer speculative hazards and crookedness
than before.
Therefore, let the march of reform be unimpeded, for it will lead us to
a higher financial and commercial eminence than even that on which we
already stand, and hasten the time when this country will be the world’s
greatest financial and commercial centre.
It would seem that many need more conservatism and prudence in their
business ventures, and they would be the better for having the
lime-light of publicity thrown on them. When the sky-rockets of the
business world fall they are not the only sufferers, for they injure
others who are perfectly sound and conservative by creating distrust of
all.
The accounting and publicity I advocate would expose, check, and prevent
the irregularities and the one-man power abuses that have ended in so
many collapses. The one-man control of large corporations must come to
an end. An ounce of prevention is better than a pound of cure.
Corporations, too, should show that they have souls by not neglecting
the welfare of their employes. They should promote their health by
giving them healthy surroundings where they work, and also by making
graduated provision for old age service, or pensions in case of
disability, after long service. This, or giving them a share in the
profits of the business, would do much to narrow the gulf between labor
and capital.
The one-man power in large corporations, with a lot of dummy directors
subservient to it, should also come to an end. Dummy directors are no
better than so many decoy ducks that mislead the public. They are
directors who do not direct, and are not expected to direct by those in
control who selected them for election. They are consequently a false
pretence. No man ought to accept a place as director or trustee of an
institution, or corporation, particularly in a banking, railway,
industrial or life insurance company, who does not fully appreciate the
responsibility of the position and the care and vigilance it demands,
and intend to faithfully and conscientiously perform its duties. To
intentionally become a dummy director is reprehensible, and directors in
dealing with the officers of their corporations should have opinions of
their own and not be afraid to express them. They are not alone
responsible for their own errors or wrongful acts, but for failure to
expose and put a stop to the wrongdoing of the officers or employees
under their control, and they should not assume such duties when they
cannot properly attend to them.
I once knew a man of very great business renown, who during the last
thirty years of his life was much sought after because he possessed the
qualifications necessary to make him a most satisfactory dummy or dumb
director. Hence he was connected with a very large number of companies.
He was a man of wealth, retired from business, and had great capacity,
but it was of the avoirdupois kind. His chief qualification consisted in
his always attending punctually all the meetings. He came early and
stayed till the end. He watched closely to determine which way the
majority vote was going and always went with it. He was never known to
open his mouth, except when the luncheon was served after the directors’
meeting had adjourned. He was much lamented by corporation managers when
he died. He was their favorite director, on the ground, as claimed, he
gave no trouble and was perfectly satisfied with the result of every
meeting. When he was handed his five-dollar gold piece for attendance it
caused him to go home rejoicing. I cite him as a specimen brick among
dumb and dummy directors.
Directors should make it their business to learn all that is going on in
the corporations and institutions that they direct, so that they may
qualify themselves to act intelligently, instead of in a blindfolded
way, as is too commonly the case. They should assert their rights, and
direct in fact as well as in name, but of course necessarily leaving all
the details to the officers. They, too, should avoid grinding axes of
their own at the expense of their companies, and co-operate with both
State and Federal officials in the strict observance and enforcement of
the laws, and never connive or wink at their evasion.
All these influences for the better would promote public confidence in
our ways of doing business, and indirectly also contribute to the
stability of our monetary position. What we greatly need is a more
stable money market in Wall Street. Such erratic changes in the rates
for Stock Exchange loans that we sometimes see would create a convulsion
in Europe if they were possible there. But as they are not possible
there, why should they be here? We are destined to ultimately become the
monetary centre of the world, but that cannot be till we acquire the
stability of the Old World in interest rates.
A freak money market, jumping up to absurdly high rates and then down
again, is as dangerous as it is intolerable. It is inimical to the
proper transaction of legitimate business, and a disturbing factor that
should be made as impossible in New York as it is in London, Paris, or
Berlin. What we need, among other things, to prevent it is more care and
conservatism in banking circles. In the European money centres the rates
for money rise and fall in response to supply and demand, just as they
do here, but within narrow limits beyond which they never pass. There is
no good reason why it should not be so with us.
It is to be hoped that the eminently well qualified members of the
committee appointed by the New York Chamber of Commerce—consisting of
Messrs. Vanderlip, Conant, Straus, Claflin, and Clarke—will reach a
solution of the problem of the money market and define how far its
vagaries and irregularities are owing to a want of sufficient currency,
capital, or credit, or sudden and excessive demands for loans,
consequent on excessive activity in speculation, or unwillingness to
lend in times of distrust and panic.
In European countries monetary stability can always be relied upon; and
that element of stability, which our money market now lacks, must exist
here before we can command the confidence of the world as the world’s
financial centre. But we are now rapidly taking steps in the right
direction, and the reform movement in business and legislation can come
none too soon for our national welfare. Let the good work of reform go
on and prosper, for from it we shall reap an abundant harvest in the
future.
There was no good and sufficiently sound reason why money, on call,
should have loaned in Wall Street at rates ranging from 100 to 125 per
cent. per annum—as it did in December last, when in other cities all
over the country it loaned no higher than six per cent. These money
spasms, while local in their actual effect, exert a disturbing and
demoralizing moral influence which is far-reaching. Such pernicious
activity in the money market is not natural. It is due to artificial
causes and ill-regulated methods affecting our local supply and demand.
For the rates of interest to be leaping wildly up and down, in the loan
crowd of the Stock Exchange, and changing violently every few moments,
according to the shifting bids and offers of the excited borrowers and
lenders, would seem to be absurd and laughable enough for opera bouffe.
But in the banking and Stock Exchange business it is a serious evil,
involving large results.
Such an abnormal money market is, of course, not very often seen, but it
occurs often enough to make it important for us to study its causes and
seek a remedy for such monetary excesses. It is indeed a topic so
serious as to call for the gravest consideration. Yet neither the
stringency nor these minute to minute, or hour to hour, fluctuations
were caused by any fluctuation going on in the volume of the currency or
any except local influences.
What we have to guard against and prevent is these occasional spasms.
Against the slow general rise and fall of interest rates for money of
from, say, 2 to 6 per cent per annum and vice versa, there is nothing to
be said, for the movement is a legitimate one, a natural result of the
varying supply and demand. We see it in the Old World, as well as the
New World, but such rocket-like soarings, and such eccentric ups and
downs as Wall Street has experienced from time to time, are peculiar to
itself. It must, however, outgrow them, and the sooner it does so the
better. It is not my purpose in this address to show how the end in view
may be best accomplished, but that it can and will be accomplished
within no long time is certain. The fault is not so much due to the want
of elasticity in our currency system as to our local methods of doing
business in stocks and lending and borrowing money to carry them.
The causes of general monetary stringency are always apparent, but the
cause of the local scarcity of cash that sends the money rate up 5, 10,
20 or even 50 per cent in an hour or so among a small group of borrowers
and lenders in the Stock Exchange, could evidently be avoided, as it is
in Europe, and it is the business and duty of both borrowers and lenders
here to avoid it.
One thing tending to produce occasional local stringency is that our
money market has to contend with the evil effects of the New York
Sub-Treasury, or rather the Sub-Treasury system, that locks money up
that ought to be kept in circulation. Every Sub-Treasury acts
practically as a Government bank, just as the old United States National
Bank in Philadelphia did, and takes in all the money it can get, but
pays out none, except on Government vouchers. So it does not perform all
the functions of a bank, and we should have a more elastic currency if
the Sub-Treasury system were abolished, which it doubtless will be in
time. Theoretically, we have no United States National Bank, yet
practically we have one in every Sub-Treasury. Until Congress amends the
Sub-Treasury and National Currency laws, the banks and trust companies
could by a united understanding prevent extreme money rates, by agreeing
not to charge in excess of 10 per cent interest; or, what would be
better still, 7 per cent, on call loans during periodical money strains.
While they would lose some immediate profits, they would be abundantly
compensated later on by making New York a greater, safer, and stronger
financial centre, which would materially increase their business.
In Germany, emergency currency may be issued by the banks in times of
stringency. This, in effect, releases them from the limit on reserves,
just as, in panics, a Government order in council releases the Bank of
England from the limit placed on its note issues, and allows it to issue
its notes to an unlimited extent. The consequent inflation of the
currency under both the German and English systems, and the revival of
confidence produced by it, brings relief in the money market.
But our only way of obtaining similar relief is for the Secretary of the
Treasury to order Treasury deposits to be made in National banks on the
security of United States bonds, or if he is willing to accept them,
first class State or city bonds. Assuming the banks to have the bonds,
the Treasury may not always have the money to spare for this purpose
beyond its proper working balance, and at the best it is a make-shift
expedient.
That we need a more elastic currency is indisputable, and also such
changes in our custom of borrowing and lending money on collaterals on
the Stock Exchange as will secure stability in rates of interest there,
even in times of stringency. The time will come when the circulation of
the National banks will be based on gold, instead of United States
bonds, and in that way our monetary system will more closely approach
that of the principal European nations. But we need not prepare to cross
the bridge until we come to it.
With regard to the other matters referred to, it is always well to
strike while the iron is hot, and at present the reform movement in
legislation affecting life insurance and banking concerns is at white
heat, not only in the State of New York, but elsewhere, and it should be
pressed forward until all the results aimed at are secured.
In the first place, to accomplish this the life insurance and bank
investigations already in progress, or proposed, should be carried out
to the fullest extent, and, through the employment of expert and
independent book-keepers and accountants, made so thorough as to leave
nothing hidden or in doubt. The results in detail should then be
promptly published, and in a form that all could understand, so that the
public would know the plain, unvarnished truth. In this way rumors and
suspicions of underhand doings, bribery and corruption, graft, fraud,
deficiencies in accounts, misappropriation of funds, and concealed
insolvency, would, if not confirmed, be contradicted and swept away,
thus leaving the concerns before under suspicion in all the better
credit and standing.
Not only should all this be done now, but the State Legislature should
be equally prompt in passing the laws necessary to maintain this high
standard of publicity in the future, and making it mandatory upon the
banking and insurance departments to order frequent examinations into
the condition of all State banks and banking and insurance concerns by
expert accountants, and publish their findings. All opposition to such
investigation and publicity is of itself calculated to excite suspicion,
whether it comes from banks, trust companies, life insurance officers,
and trustees, or other concerns, or parties in interest. Industrial and
other corporations of all kinds, including railways, ought also to be
made, by mandatory laws, subject to stricter supervision and periodical
examination as to their financial condition. Hence the Attorney-General
of this and other States should be invested with new powers to this end,
and the provisions of the laws should be made mandatory upon them. They
should call for verified statements of earnings, profits, expenses,
capitalization, indebtedness, dividends, property valuations,
liabilities and assets, so that large corporations would cease to be
blind pools, and fraud and misrepresentation would be checked by being
exposed; and it is exposure and publicity which is most dreaded by those
who prefer crooked ways to open and above board business methods and
integrity of purpose. But those who have nothing to hide have much to
gain from it, and should welcome the lime-light of this new era of
publicity. Secrecy is only the defence of the weak.
The recent decision of the Supreme Court of the United States in the
Tobacco and Paper Trust cases, that corporations cannot take refuge in
secrecy, but must give testimony as to all their transactions, when
required, even where it is self-incriminating, is a great victory of the
people. It marks the beginning of a new departure in corporate
management by enforcing existing laws, and requiring that publicity of
accounts, which large industrial, railway, and other corporations, and
most notably the large industrial trusts, have hitherto so strictly
guarded against and avoided, after the blind pool fashion.
The decision is that the law as it stands, giving a witness the
constitutional privilege of refusing to give testimony tending to
incriminate himself, does not extend to or cover his refusal to produce
books and papers that would incriminate his, or any other corporation,
the immunity being wholly personal. He cannot, therefore, assert it
either in behalf of a third person or a corporation, yet strange to say
this clear and convincing reasoning has never been put forward by
lawyers opposing the trusts. But it will make the way of the corporation
transgressor harder in the future.
It opens the door and clears the way for a thorough, complete, and
public examination of the affairs and accounts of the trusts. It removes
the first loophole for their escape from the consequences of their
unlawful acts, and from the exposure of their methods of opposing and
crushing competitors. They will, therefore, become liable to prosecution
under the Sherman Anti-Trust Law, and all unlawful combinations,
schemes, and conspiracies will be effectually and permanently broken up.
This decision is pf such vast and far-reaching importance, not only to
all directly concerned, but to the whole country, that its legal effect
and its moral influence can hardly be overestimated. It will probably
become as famous in the history of the Supreme Court as the Dred Scott
decision; and it will prevent in future the miscarriage of justice for
want of evidence against corporations, which has so frequently occurred
in the past. It will also raise the moral tone of corporate management
by enforcing publicity before refused, for the decision not only applies
to all railway and industrial corporations, but banks, trust companies,
and insurance companies of all kinds. It shows that a rigid enforcement
of existing laws is alone necessary to correct many abuses of long
standing.
The temptation that secret acts and secretive general management present
to those disposed to wrongdoing and chicanery, malfeasance,
misappropriation, and graft can easily be imagined; and it can also be
as easily inferred that such management is apt to give rise to
suspicions and rumors detrimental to the interest of the corporations
concerned, and indirectly injurious to others. Honesty is not only the
best polity, but a moral duty, and should be as much the watchword of
corporations as of individuals, and no man should betray his trust for
either love or money, whether acting in or out of a corporate capacity.
There is more permanent prosperity, as well as honor, to be secured by
honest than dishonest means, and to quote the Bible, “What does it
profit a man if he gain the whole world, and lose his own soul?” Yet
unscrupulousness in high places of trust is often forced upon public
attention. This should all be swept away as a debasing element in
business life, for dishonesty, like the upas tree, casts a blighting
influence wherever it is.
The corruption of judges and juries and the bribing of legislators
should be more abhorrent than larceny itself to every captain of
industry and all corporate officials, who should have equal respect for
the truth and their own honor. Great wrongdoers should be no more exempt
from punishment than small offenders and mere millions should furnish no
protection to them.
Great fortunes accumulated by monopoly and oppression, and other
dishonest means, are no credit to their possessors, but really a
reproach, and the abuse of power by them is a great national evil. Every
business man should take pride not only in his regard for honesty,
truth, and fair dealing, but in his own personal honor, whether he is
acting for a corporation or himself. We are now on the highroad to the
correction of a multitude of abuses and the country is to be
congratulated upon this salutary movement for improvement and reform in
our business methods. Our great remedy is PUBLICITY, and the enforcement
of the law.
The immensity and grandeur of our national progress and achievements
justify us in looking forward to a still greater and grander development
in the future and still more splendid triumphs of mind over matter than
we have already accomplished. I do not say with the spread-eagle Fourth
of July orator:
“No pent up Utica controls our powers,
But the whole boundless continent is ours.”
Yet it cannot be ignored that no other nation has such a magnificent
career of expansion, development, and progress before it as the United
States, united as it is by telegraph and telephone and our vast network
of railways, from the Atlantic to the Pacific, and Maine to Florida, in
unbroken continuity.
[Illustration:
WILLIAM H. MOORE.
]
With the growth of our population, which even now exceeds eighty
millions, we shall grow more and more in national importance and wealth,
not only in material wealth but in the higher products of an advancing
civilization, in the arts and sciences and literature, and all that
embellishes and glorifies mankind. Therefore we should, as we go along,
constantly endeavor to correct errors, shortcomings, and abuses, and
prune away rotten and unsound timbers in our public and business life,
and make the whole machinery of business and activities of all
kinds—trade, banking, insurance, manufacturing, legislative, and the
various professions and mechanical industries, work as legitimately,
honestly, smoothly, and harmoniously as possible. The way to do this can
be best paved by promoting public spirit, and sweeping away the
opportunities for business wrongdoing in secret, such as rebating, by
wise laws properly enforced, and backed by public opinion, yet laws not
oppressive, unjust or too inquisitorial. This would compel the “crooks,”
“grafters,” “rebaters” and “competition crushers” of the business world,
who have schemed in darkness, and shunned the light, to come out into
the open view, and this publicity alone would be a perfect cure for many
great evils. So let us have more light—the light of PUBLICITY.
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