THE USES OF DIRECTORS. T HE examination of the Chartered Company's
directors before the South African Committee was very oppor- tunely preceded by that of a solicitor of great experience in company matters before the House of Lords' Com- mittee on the Companies Bill. The opinion of this expert may best be summed up in one of his own sentences. " I do not know," he said, " any large concern where the business could be carried on if every director attempted to make himself thoroughly cognisant of the business." This deliverance, coming from such a quarter, is startling enough at first sight, for the obvious inference seems to lie that directors are a useless and unnecessary burden upon the revenues of the company, the interests of which they serve best by remaining as ignorant as possible of the business by which it subsists. Nevertheless it is evident that general supervision may be salutary where detailed interference would be fatal, and though the evidence given to the House of Lords' Committee raised a very interesting question by pointing to the inherent weakness for some sorts of enterprise of the joint-stock system, it did not justify the assumption that directors buouhl be abolished altogether.
Walter Bagehot, dealing in his work on "Lombard Street" with the greatest and most important joint-stock company in the world, the Bank of England, points out that its " government is composed of men with a high average of general good sense, with an excellent know- ledge of business in general, but without any special knowledge of the particular business in which they are engaged. Ordinarily, in joint-stock banks and companies this deficiency is cured by the selection of a manager of the company, who has been specially trained to that particular trade, and who engages to devote all his experi- ence and all his ability to the affairs of the company. The directors, and often a select committee of them more especially, consult with the manager, and after hearing what he has to say, decide on the affairs of the company." In the case of the Bank of England, however, the two weak points upon which Bagehot laid most stress were the facts that the Governor and Deputy-Governor, who form the chief executive power, change every two years, and that though "under this shifting chief executive there are in- deed very valuable heads of departments these officers are essentially subordinate ; no one of them is like the general manager of an ordinary bank,—the head of all action. The perpetually present executive—the Governor and Deputy - Governor—make it impossible that any subordinate should have that position. A really able and active-minded Governor, being required to sit all day in the Bank, in fact does, and can hardly help doing, its principal business." Here we find Bagehot exposing, as a weak point in the constitution of the Bank, the very thing that the House of Lords' Committee desired to insist on in laying down the duties of directors. By stipulating for " diligence" and "reasonable care "—both very vague and indefinable qualifications—on the part of directors they tended to substitute for " the high average of general good sense," which is the real essential, the desire to manage the business for themselves instead of consulting with the manager. Such a system, condemned nearly a quarter of a century ago by Bagehot in the case of the Bank, is now protested against still more strongly by an experienced company solicitor, on the ground that directors would thus "cease to be directors," and that no large concern could be carried on on such terms. It is obvious that all enterprises, large or small, are best conducted by a despot, qualified by the necessary constitutional checks. The weakness of joint-stock corporations, as compared with private firms, lies in the fact that the manager, who is necessarily a salaried official, has not the same keen personal interest in the progress of the concern that is felt by the private pro- prietor fighting for his own hand. This weakness is only emphasised when the directors consider that they know as much about the business as the manager, and that instead of consulting him at every point, they can best show their utility and enthusiasm by striking out a line of their own and interfering with the details of the management. The ideal board of directors is one which regards itself merely as a sub-committee of the shareholders appointed to give up some portion of their time to the supervision of the business, and report to the rest of the proprietors from time to time as to its progress. It thus follows that the success or failure of joint-stock concerns depends almost entirely on the selection of the manager, and we have no doubt that if the apparently inexplicable fluctuations in the fortunes of many companies were carefully examined, it would be found that the efficiency, or otherwise, of the chief salaried official was at the root of the matter. There is, however, one obvious point at which the interest of the manager conflicts to a certain extent with that of the pro- prietors. Expenses of administration—the salaries of him- self and his subordinates, the comfort and convenience of the office which they use, and similar matters—are affairs in which the manager might naturally, and even rightly, consider himself and his staff as entitled to more con- sideration than the shareholders ; and it is here that directorial supervision is occasionally required. Other less legitimate crannies for leakage require sterner watch- fulness. Ugly stories are heard sometimes, for example, of mining companies being equipped with magnificent machinery which their output is quite inadequate to keep employed, the handsome commission given by the makers to the company's officers being the cause of this unwarranted extravagance. The shareholders can only look to the directors to prevent such frauds ; but unfor- tunately, if half of what rumour says is correct, it is too often the fact that the board shares the plunder.
It may be contended that if the utility of directors is confined to so narrow a field, most companies are provided with too many of them. This we believe to be true to a great extent, though in some cases they are also useful as a sort of high-class canvassers. The great competing railways, for instance, find it expedient to have on their boards a large number of the chief merchants and producers of the districts that they serve in order to secure their custom, and that of others whom their influence may attract. In the case of banks and insurance companies, again, which trade on public confidence, names well-known as "sound" in the world of finance are a very valuable asset, and a goodly array of them in the list of directors is practically essential. And all new companies that appeal for subscriptions must strive to show good names on their prospectuses. Unfortunately, the general mass of investors—" the flock that's sheared, but not dis- criminates," if we may parody Mr. Qailler-Couch's parody —does not know a good name from a bad, and is induced by natural human snobbery to consider a name with a "handle" to it as an allurement. We should have fain believed that this superstition was dying a natural death, but an amusing case recently reported shows that there is now an organised market in titled directors. The plaintiff's case was that he had been promised £500 in cash and five founders' shares for the production of three directors any of whom the defendant, who was bringing out a company, should consider eligible. It appears from the Daily News' report that he " pro- fessed his ability to obtain the consent of distinguished gentlemen to act as directors, he being a member of a select club in the West End." He fulfilled his boast and produced a belted Earl, who was willing to take a seat on the board. Unfortunately, the nobleman was a little late in sending in his written consent, so that the board was formed without him and the defendant refused to pay the £500 promised. Mr. Justice Day confessed that he " did not understand this buying and selling of Peers or of any- body else. It appeared, however, to be a practice, and the plaintiff having completed his part of the bargain, was entitled to payment. Judgment for plaintiff for £500, with costs." An appeal to the " Directory of Directors " reveals the fact that the said Earl is already on the board of three companies, and we are tempted to wonder whether his name and influence can, or can not, have been secured for them by the same sort of agency. This, however, is merely a side-light on the uses of directors ; but when the curtain of mystery that usually screens the machinery of company promotion is thus accidentally raised, it must be admitted that the secrets exposed donnent furieusement penser.
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