Stop, Look, Listen! The Shareholder's Right to Adequate Information

Just a few years before the Crash of 1929, Harvard economics professor William Z. Ripley warned that corporations weren't providing accurate financial information to their investors and argued that a framework of regulatory oversight was needed. The creation of the Securities and Exchange Commission in 1934 has been in part attributed to Ripley's Atlantic writings.

When two highways intersect out in the country, with but an occasional passage of slow-moving vehicles and with a clear view all about, things care for themselves naturally, so far as the public safety is concerned. But when the volume of this traffic increases; when high-powered cars and heavy trucks are propelled at speed by careless or drunken drivers; when a fleet of little irresponsible and often overcrowded craft out for a holiday dots the stream; when great structures, pushed forward to the utmost building line, obscure the vision—then, as the appalling record of deaths and casualties betokens, the time has come for public supervision at the crossways. Necessity may arise for the posting of officers or of automatic signal towers at junction points. Even before resorting to these extreme measures, however, the simple remedy of visibility suggests itself. Electric flood lights by night and the removal of all obstructions that hamper outlook are immediately in order.

This homely figure is quite applicable to the present condition of our corporate affairs in the United States. The sudden advent of widespread popular ownership of corporations since the World War has created entirely new circumstances and conditions in the business world. Main Street and Wall Street have come to cross one another at right angles--Main Street, our synonym for this phenomenon of widespread ownership, and Wall Street, as applied to the well-known aggregation of financial and of directorial power in our great capital centres. This intersection of interest, so often at cross-purposes, is marked by an imminent danger of collision at the junction point of ownership and management. The volume of business, the high speed of propulsion, the growing obstructions which stand in the way of visibility, suggest that in this domain also a prime necessity is the letting in of light to the fullest degree. American business affairs, in so far as they have assumed the corporate form, under this recent aspect of public ownership, are still too largely carried on in twilight. Great progress has already been made; but it is high time that the imperative need of putting things upon a universally sounder footing be generally understood.

How many plain, ordinary American citizens have suffered something like the following experience, paraphrased from a forceful description by a denizen of Wall Street himself?

A stockholder in the X. Y. Z. Corporation receives a blanket proxy for the next annual meeting of the concern for the purpose of transacting such business as may lawfully come up for consideration. There is a request to sign on the dotted line, giving the president of the company, by proxy, the right to vote. There is a natural desire, before granting this general license, which includes, by the way, approval and validation of all of the acts of officers and directors for the preceding year, to know a little more about the company's affairs. There is worriment, perhaps, about an investment made sometime previously, at $30 per share, on the basis of newspaper reports that the company would show earnings of at least $6 per share for the year. Consultation with a broker elicits a favorable opinion of the company and its management. With such excellent promise, still merely surmise and rumor, the chance of increase of income as well as of principal appears good. After a few months the official report is issued. The company has earned but $3 a share, instead of $6. The quotation drops to $4. Yet the president, in his published statement to stockholders, refers to the company's progress, praises the loyalty of the employees, and holds out high hopes for continued prosperity. The quotation advances, perhaps, to $33 a share, a little above the purchase price. There is a rumor in the press that dividends are to be increased. The president promptly denies this report. Thereupon the stock drops, hangs dormant for months, and betrays a strong disposition to sag still further. Along comes a reduction of the dividend because of the unpromising business outlook; and still no authoritative statement of earnings. It is all very disheartening--the uncertainty perhaps worse than the truth.

Dismayed at this reduction of income, the stockholder writes a letter of inquiry to the company, prompted by the loss of one third in both principal and income. The letter elicits this reply:--

The financial statement will not be ready before the annual meeting of the stockholders in March, at which time all stockholders will receive a copy. In justice to the other stockholders I cannot give you any advance information about the operations or financial condition of this company. Nor can I advise you on what policy to pursue for your investment. It is unfortunate that you have suffered a loss. I have always looked with disfavor upon having the stock of this company become a vehicle for speculation in the market. I can assure you that the company is in a good financial position. I trust that you will sign and mail your proxy at an early date. Very truly yours,

President --

This veritable document emanated from a company in existence for many years and with an international reputation. It was not a fly-by-night concern. As my correspondent writes, 'No white-collar bandit had sold the stock.' Here was a real 'partner' in the concern, seeking in vain, either from reputable bankers or from the corporation itself, information. Something is evidently wrong about the whole business. What usually happens, of course, is that the investor sells out, takes his loss, and strives to forget about it, investing the proceeds in another enterprise. Will he fare better therein? And what about the second stockholder who relieved him of his former holdings? And what about the general reaction upon the little stockholder's mind? As one put it, 'I have not been a believer in antitrust legislation, but I am changing my mind.'

On my table is a great pile of recent official corporate pamphlets. The premier concern on the list is the Royal Baking Powder Company, which fails to register in this collection at all, in as much as it has never issued a balance sheet or financial statement of any kind whatsoever for more than a quarter of a century. Publicity it has surely courted--as witness the printed record of the old United States Industrial Commission of 1900. But this particular kind of publicity, despite a considerable distribution of the stock, which is fairly active both in the unlisted market and on the New York Curb, seems to have been overlooked. Akin to it is the Singer Manufacturing Company, which handles 80 per cent of the world's output of sewing machines. Neither hide nor hair of financial data is discoverable in the usual sources of information. The dance-card, balance-sheet, or picture-book variety of corporation report follows hard upon these. For concerns like the National

Biscuit Company such newfangled gewgaws as income accounts or depreciation simply do not exist. American Can gives you depreciation for 1925, but never a whiff concerning its accrual through past years. Diminutive, dainty, tied up with fancy string, perhaps, these reports are tenderly reminiscent of the parties of our youth. Some may have elaborately decorated covers, like paper on the wall--particularly among public utilities with extensive customer ownership. Some, like the Gillette Safety Razor Company (counting almost 7000 shareholders in 1925, are inviting pictorially, however uninformative they may be. Emblazoned with gilt or colored reproductions of one thing or another, on large sheets of heavy glossed paper, again tied together with a fancy string, they are pleasing to the eye. Yet colored pictures of factories, brightly lighted at night,--as some of these must well have been in view of their extraordinary success,--tell no tales. What an extravagance of good paper and ink, about as nutritious as some of the advertising displays of ham and eggs or other standard articles of daily consumption in the popular magazines!

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