THE OGRES OF THE CITY. T HE great financiers of the
City, the leading merchants, the solvent bankers, and the " powers " of the Stock Exchange, ought to take some action for the reform of the present method of managing large companies. Day after day some big company becomes discredited ; after weeks of delay there is an investigation or a smash, and, with variations of detail, the story revealed is always of the same kind. There has been mismanagement, sometimes fraudulent, sometimes only crass ; the capital, frequently amounting to millions, has disappeared ; the reserves, which shareholders rely on, are non-existent, except on paper ; and while the shareholders are ruined, creditors, often including whole classes, will never receive their money. Take, for example, as a modest specimen of the prevailing system, the official report of the committee of creditors of the New Oriental Bank Corporation, as condensed in the City article of the Standard, on Tuesday, the 5th inst. The committee consists of John Blair, S. P. Low, A. R. C. Pitman, J. L. Lyell, and G. M. Drury, and "they report a deficiency, as far as shareholders are concerned, of £2,129,813. Of this enormous total, £776,848 was due to losses at branches, £1,006,854 at bead office, and £346,111 is the estimated loss in bringing home moneys at reduced rates of exchange. The shareholders can only provide £632,522 of this sum, the capital and reserve being wholly wiped out, leaving a deficiency, as regards creditors, of £1,497,291. The committee attribute the failure of the bank to several blunders and to the large investments made at the head office 'in securities of a dubious kind,' while other large advances were made to customers both at head office and branches upon securities altogether insufficient, and of a kind not easily realisable.' Four of the Directors, it appears, received large loans from the bank, but the value of securities lodged against these loans were, with one exception, at the date of the suspension very much below the amounts of the debts. Some of the Directors also were instrumental in bringing the bank into relation- ship with new companies, to which large advances were aniade, and upon altogether insufficient security." That is the report in plain English of two millions sterling pitched into the gutters through the fatuity of men who have succeeded to the management of a Bank which was once for a whole generation the pride of British India, both for its solvency and its management. There have been a dozen such reports within the year about financial and commercial institutions which have " gone ; " there will be at least half-a-dozen more about other concerns which must very speedily go ; and there ought to be a score more about institutions which will stand for a time only because the secrets of their parlours are still unrevealed. In other words, in one department of English business there have been losses of millions, each million involving ruin, or a sudden descent of painful care on perhaps two thousand entirely blameless and industrious households, most of them full of cultivated men and women who ask of Heaven competence as the first of blessings, and who, so far as their own careers are concerned, have deserved it. They have done no ill except invest money on the faith of lying promises, and of an organisation of business which is a disgrace to the ability of the British com- mercial world. They have known nothing of what was going on ; they have been as powerless to interfere as the mice in their own offices ; and they have to bear all the con- sequences without a hope of redress, or even the vitriolic luxury of vengeance upon those who have betrayed them. Under the system they have elected, or rather appeared to elect, Directors—for Directors are really elected by co-opta- tion, the Board and their friends ruling a permanent majo- rity of the active votes—and the Directors, once nomi- nated, have done with their property precisely what they pleased. If they were rogues, they have lent most of it to friends, or to speculative companies which they were interested in bolstering up ; if they were dolts, they have lent it on securities at which no keen man of business would so much as look. Imagine a quarter of a million lent, as a shareholder affirms has happened in one concern on a Central American—not South American, but Central American—contract ! Why not lend on a contract for ice in New Guinea P In neither case have the shareholders the smallest remedy, or any power of control, or, indeed, any means of obtaining information while the evil is going on. The Directors will tell them nothing ; if they inquire at meetings, they are blandly assured that every- thing is going well, or that they are inquisitive im- pertinents ; and if they inquire at the office, they are treated as presumptuous busybodies, probably in league with the "wreckers," who are the standing bugbear of City firms. As long as dividends are paid they usually yield ; if too much frightened, then sell their shares to men even more ignorant than themselves ; and at last, when the crash arrives, the shareholders find their money gone, their Directors irresponsible and blander than ever, and their friends all eager to reproach them with not look- ing better after their own business. The sheep, in fact, are abused for not watching the shepherd's dogs. We are utterly unable to believe that a system so encouraging to fraud, and so successful in placing fools in great mercantile positions, cannot be improved. The popular suggestions are, we know, often a little irrational and wild. The principal of these are Government inspec- tion, publicity, and more stringent laws to enforce the responsibility of Directors ; and the objections to them all are very serious. It is not the business of Government to manage commercial concerns or to control them either, and if it began the work we should in ten years be infected with the " Pananxist " form of corruption from which we have been comparatively so free. The officials must trust experts, and the experts would be bought like " freemen " in the ante-Reform times. Publicity cannot always be fully secured, for customers will not deal where their affairs may be talked about ; and there is—in " finance " more particu- larly—much profitable business which would be lost in a moment by undercutting, if even shareholders knew what proposals were under consideration. No private con- tractor in his senses would publish the detail of his specifications, and so bring down on him every competitor in the trade. Even in the matter of buying securities, for which just now some companies are under such opprobrium, secrecy for a time is sometimes indispensable. Suppose a company—say a Trust Company or an In- surance Office—is about to buy two millions' worth of anything (it hardly matters what, except Consols), and talks about it, the price will go up against them two or three per cent., their shareholders thereby losing from sixty to a hundred and eighty thousand pounds. We give these figures because they strike; but in much smaller transactions the process is the same. Nor are all shareholders the best judges of what " securities " mean. They all know that Costa Ricans are not good bonds, and that Jabez Balfour's signature is not worth much ; but of the expediency of an advance to a particular bank, firm, or contracting syndicate, they know no more than they do of painters' "values," or counterpoint. Publicity only replaces one set of ignoramuses by another, not to mention the advantage it gives the wreckers. Nor can we much believe in the advantage of increased stringency in the laws, except, indeed, to punish direct stealing. If Directors are held so savagely responsible that an error of judgment may possibly be punished like a fraud, you will have no decent Directors to manage industrial or commercial concerns. They will not endure, for a larger interest on their money, the risk of the plank-bed or the assaults of the blackmailers. The object is to secure better Directors, not worse ; and kicking them will not secure it. What is wanted is addi- tional certainty that Directors will do their duty, and are capable of doing it ; and it seems to outsiders that there must exist some method of improving on the existing system, which is really one of co-optation spoiled. by the -fact that the co-optators are nominally irresponsible for those they choose. It is as if the captain of a cricket eleven were really to choose his men, while in theory they were selected by the owners of the cricke-field, who alone were responsible for the new men's playing-powers. We see no help for this while ignorant shareholders are legally owners ; but at least we might get rid of the guinea-pigs, and impecunious Members of Parlia- ment, and popular ministers of religion, by stopping all Directors' fees, Let the Directors look after their own money, and take their reward in heavy dividends. It is true that, as a rule, the phantom Directors do not steal; but it is under cover of their names or their votes that the business Directors are enabled to pilfer or to job. The Chairman alone should be paid ; and we doubt whether he should, not also be directly elected by the shareholders, or the shareholders with heavy stakes, with a special mandate to look after their interests. The Directors would then watch him, and he would watch the Directors. It is objected that the Americans have tried this scheme, and are worse robbed even than we arc; but the Americans leave their Chairman as they leave their President—a monarchial position. We do not see, either, why in every company the holders of a certain number of shares should not form a permanent Watch Committee, ex officio, with right at any time to demand the fullest in- formation. They will not be indiscreet any more than Directors, because their own money is at stake, and they may stop many a dangerous or semi-fraudulent transaction. It is not, however, our business or our wish to put forward any particular remedy, which ought to be provided by the City experts, but only to plead that the present state of affairs is thoroughly disgraceful. The Limited Liability Act, which might do, and indeed has done, so much to expand trade and relieve investors, has become a screen for thieves and idiots, the latter in particular. We do not want to mention names, as this is not a City journal ; but it is difficult to read some of the recent reports of great companies without believing that large industrial under- takings have some unknown power of striking able men with temporary dementia. Who would have believed that the managers of Ba,rings' would hold all those rubbishy bonds, or that the kind of men who governed Austra- lian Banks would lock up capital in that way, or that Lord Rookwood could be chairman of a com- pany managed as his, on the best view of it, must have been, or that shrewd men of banking experience could have fallen into the kind of pit revealed in the report of a committee quoted above ? Against stupidity, of course, even the gods fight in vain, but there ought to be means of preventing even the fatuous from fooling away the money entrusted to their management by blindfolded investors. The management of the Bank of England is said to be cumbrous, but at leist it has gone on for two centuries without material loss, and has entirely avoided that cataclysm which, if the present system continues, will in the next century overtake, one by one, every bank in the country. We should like to know what guarantee shareholders in our huge joint-stock banks have, that the Directors whom they do not know, and the managers whom they never saw, are doing rightly with the affairs about which they dare not so much as ask a question. They are not at the mercy of an individual, as the tens of thousands plundered by Jahez Balfour seem to have been, but they are at the mercy of committees, which they think they choose, but which are really chosen by a con- cealed or open system of co-optation. In every joint- stock bank at least there should be a Watch Committee.
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