SHAREHOLDERS AND DIRECTORS.
WE have of course, no intention of commenting on the "Oil Wells Case," the case in which so many Members of Parliament are accused of sanctioning a false prospectus, until it is concluded, but the trial will inevitably bring up once more one of the greatest of City difficulties. What is the best way of managing Joint-Stock Companies ? The English way is for the promoters to suggest and the shareholders to appoint a Committee of gentlemen with nearly absolute power, to provide for change by rotation, but to leave the Directors who retire open to re-election. In a country which believes in Committees and manages everything through them, from the affairs of the Empire to the arrangement of a Hunt Ball, that seems a reasonable method, but except in very great Companies it does not work well at all. The promoters and shareholders have the greatest difficulty in getting the right men together. The absolutely best Directors, the City magnates who really know the business to be carried on, and are also known to the public, will not connect themselves with the smaller undertakings, and the subscribers are forced to content themselves with substi- tutes whom they do not know how to choose. If they take less dignified and less rich experts who could manage as well as the magnates, the public will not subscribe, because it does not know the men ; and if they take men who are known but who are not experts, they run the risk of seeing their affairs administered either too cleverly or with too little ordinary knowledge. They generally prefer to compromise matters, and select one or two able men, with six or seven others in whose names they think the public will place some confidence. These latter for promoters' purposes ought to be, and often are, either Peers or Members of the House of Commons; but as the supply of either is limited and the Companies are endless, they put up with anybody who has a handle to his name; old Indians, old soldiers and sailors poor baronets, anybody who, as they calculate, the public will think unlikely to cheat them. The Board so constituted is really a mere screen for one or two persons about whom the public know nothing, but who under- stand what they are doing, and who either "go in" for suc- ceeding, in which case they often succeed, or for high pre- miums on the shares, in which case they as often fail. While affairs flourish, their fellow-Directors are dummies, the share- holders mere names, and the Board a permanent body elected nominally by the shareholders, but really by a system of strict co-optation, broken only when it is necessary to soothe a critic, or to seat somebody with a great number of proxies in his pocket. The moment anything goes wrong, the experts retire, the "names" get panic-stricken, and the shareholding body resolves itself into an inorganic and very angry mob, which knows nothing of its own business, can get no thorough information from anybody, and has the greatest difficulty in finding decent Directors. Sometimes the Company goes on and recovers, sometimes it drifts into the abyss called liquidation
—when the wreckers profit, and nobody else—and sometimes there is a huge and scandalous trial, followed by a distrust which extends to the soundest projects. The Directors, who may be only stupid, are discredited for life ; the shareholders, who may be only ignorant, are roundly fined ; and the plan of carrying on industrial enterprise through Companies, which is not only sound, but inevitable, is denounced as imbecile.
We are, of course, merely repeating truisms, but they are truisms which, though acknowledged, take no kind of hold on the public mind. The very next Company started will be governed by a Committee framed as we have described, and will attract subscribers in the regular way, through a prospectus which may be true or may be false, but which is guaranteed by nothing except a list of names, about the possessors of which the public fancies that it knows a little. No other plan of management is ever suggested, and to the great majority of Englishmen no other apparently seems even possible. Sometimes, no doubt, they see that a Managing Director is added to the Board, but they think of him only as one of many, have no special relation to him, and would consider any special action of his, such as a direct appeal to them in his own name, an act of treachery towards his colleagues. They look to the Board as a whole, and on the very just theory that a Board should be sustained or dismissed, they sustain it until some- thing awakens their suspicions or their tempers, and then they act in a hurry on imperfect information, and with an utter dis- regard of the injury they may inflict on their own property. So inveterate is the practice, that suggestions even for its par- tial modification are rejected without inquiry. The cautious Scotch, who are always guarding against fraud, insist that the Directors of a Bank when retiring by rotation shall actually retire, so that new men shall be enabled to understand the Company's affairs ; but the English think that device affronting, and, more- over, calculated to diminish the experience at the Board. The Anglo-Indians, aware that they must from geographical diffi- culties be disorganised, usually entrust all power to a paid agent, and only watch him through a Shareholders' Committee. The Americans, who think their Constitution came down from heaven ready bound, make the President of a Board the shareholders' representative, and give him very often a power best described as that of veto. In Italy the Director-General is often a dictator, but is held specially responsible to the shareholders and the law. None of these plans, however, finds the slightest popular acceptance in this country, while the alternative—a State audit—excites, as often as it is suggested, and it is always suggested after a great catastrophe, a sort of rage. Directors are urged to refuse to accept situations where they are distrusted, the State is denounced for over-interference, and the middle-classes are tauntingly asked if they acknowledge their own incompetence to manage their own affairs. The pro- posal is never sustained, though all the while the shareholders in minor Companies need protection, and know that they need it, just as much as the members of the Friendly Societies. We cannot secure even a State audit for Life Insurance Companiee„ though the majority of shareholders in such Companies not only know nothing about them, but would know nothing if they had access to every book kept in the concern. They, in fact, accept statements in an unknown tongue as proof positive of prosperity.
We have not the slightest hope of any radical change in the existing system. There will always be crowds of people with small properties and smaller incomes to whom the temptation of large per-centages is irresistible, and who cannot see why mobs of little capitalists cannot make profitable concerns pay as well as single individuals. There will always be promoters, honest and dishonest, ready to tempt these crowds, and those promoters will always prefer governing through Committees whose names protect the honest from the public ignorance or screen the dishonest from direct responsibility. The expert would not be elected President, and he does not want a President over him ; and the inexpert is attracted by the idea that he shall speedily "get his information up." Our only hope is that shareholders, when they have lost enough to wish for change, may try in time some one of the plans they often try too late, —may, for example, adopt some such humble suggestion as this. Suppose, in addition to their regular representatives, Chairmen, Directors, Managers, and what not, they take a lesson out of old monastic and university practice, and at their first general meeting for organisation appoint a Visitor, with no right beyond that of investigating and reporting the truth to them. They can see, we suppose, that if he were a competent man of business, strictly honest, and reasonably discreet, he would be a great protection to them, and why should it be
impossible to obtain the aid of such a man ? There are hundreds of men of high character in England, and scores of men of high character and fixed position who are only anxious for something to do, and who would be specially attracted by a position involving responsibility and rewarded by emolument, but not accompanied by the necessity for daily work. It would be invidious to mention living names, but take a man like the late Sir Charles Jackson, who investigated the affairs of the former Bank of Bombay and of the London, Chatham, and Dover Railway with such success. What would it be worth the while of any Company to pay for his distinct assurance after investigation that all was going on straight ? We do not say that any minor Company could afford to pay such a Visitor, but a dozen Companies might, and would in paying him secure services as valuable as those of a State Auditor,—and indeed more so, as the State Auditor would be compelled, more or less, to trust. the figures before him. We believe, if the innovation becomes general, a class of men would come forward who would be as much trusted as the Judges, and very nearly as discreet, whtse visits would be the terror of dishonest directors, and who would have the power to insist that any suspicious transaction or method of doing business should be at once abandoned. A new and a very high profession would spring up, with a professional honour, and with, in time, a certainty that the raspy honesty which might occasionally cost them work would in the end recommend them to the public choice. It is in the existence of an officer with power to investigate, yet unfettered by personal responsibility for the measures adopted, that the security of shareholders must lie, and he can be obtained only through the intervention of the State or their own election. Govern- ment by Committee, in fact, in commerce, as well as in politics, needs the check of an independent Press, and in commerce does not obtain it. The Visitor we suggest would be to the Companies which accept him what the Times is to the House of Commons,—an independent critic and reporter, through whom the shareholders in the national concern can see what their Board is doing.
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