The Government and the Corporations

THE relation between the government and the corporations is that between two existences similar in nature. As observed by Professor Maitland, ‘There seems to be a genus of which State and Corporation are species. They seem to be permanently organized groups of men; they seem to be group units.’ Sir Frederick Pollock says that ‘the greatest of artificial persons, politically speaking, is the State.’ These utterances fairly present the conclusion of the present day that every government essentially is a corporation, in the sense that ‘ it is an entity separate and distinct from the sum of the members that compose it.’

The government here referred to is distinct not only from its members, but from the person of its administrator, be he emperor, king, president, or governor. Whatever his style or name, the head of the government is merely what has been termed a ‘ Sovereign Member.’

This distinction between the private person and the public person termed the sovereign, has been noted from the time of the early canonists to that of our modern satirist. The former said, ‘The Commonwealth can do no act by itself, but he who rules the Commonwealth acts in virtue of the Commonwealth, and of the office which it has conferred upon him.’ Thackeray contented himself with presenting in triptych caricature Ludovicus Rex resolved into Ludovicus and Rex. The most magnificent of monarchs, unapproachably absolute in power, and despite his declaration that he was the state, was utterly incapable of absorbing the state into his own personality. Such a complete identification has been presented only in the pure theocracy of the Hebrews, whose sovereign Jehovah is identified in our English Exodus as ‘I AM.’

The lofty conception of such an absolute, isolated, and all-containing sovereign is unattainable in any finite arrangement. Even in our latter-day republics, the continually declared sovereignty of ‘the people’ is purely idealistic. As suggested by Professor Maitland, it may be a question whet her the people ‘that sues and prosecutes in our courts is a collective name for some living men, a name whose meaning changes at every minute.’ Some such obscurity beclouds also the current question, ‘Shall the people rule?’ which seems sometimes to mean only a part of the people; perhaps only a plurality, and apparently none who are able to stand alone.

This somewhat abstruse and remote introduction has been intended to lead up for the purposes of this paper to a definition of the term government. This we understand to be the power that, within its particular jurisdiction, makes and executes the positive law. In this sense the government does not include the judiciary, which executes no law and, at least in theory, makes none. The government is neither the legislature alone, nor the executive alone, nor yet the sovereign people, but is the personification of the sovereign will.

What then is the relation of this government thus defined to the other artificial entity, the corporation, and specifically the business corporation?

In the public mind, and in the mind of many publicists, the corporation derives its existence from the State as its creator. This, as Professor Maitland observes, was the teaching of the legists and canonists. ‘The corporation is, and must be, the creature of the State. Into its nostrils the State must breathe the breath of a fictitious life, for otherwise it would be no animated body, but individualistic dust.' But, as we shall see, the fact is that, except for statutory prohibitions, substantially all of the so-called essential features of corporations and corporate action could be developed, and be exercised, pursuant to voluntary agreement, without any direct authority or assistance from any government whatever.

In its relation to current theories of the responsibility of the corporation to the state, this point is of sufficient interest to be considered somewhat particularly. Mr. Taylor, with his accustomed accuracy, has stated that there is no reason to believe that in the early times any special authorization from the state was necessary in order to form a corporation, though it became so under the Empire. Certainly it became so under the Papacy, when Innocent IV, in the plentitude of temporal power, promulgated (and apparently he was the first to conceive) the celebrated ‘fiction theory that the corporation is a person, but only by fiction. It. is interesting just here to note that the Roman idea of the corporation found expression in two terms, Universitas and Collegium, which now have become absolutely divorced from all thought of trade, but are inseparable from the idea of higher education.

As stated by Blackstone, under the civil law the mere act and voluntary association of its members was sufficient to create a corporation, ‘provided such convention was not contrary to the law, for then it was “collegium illicitiun.” ’

Except as and when expressly prohibited by statute, two forms of association answering many, if not all, of the purposes of a corporation, have been developed under English law without the necessity of express governmental consent. These two methods of combining the contributions of many for the conduct of a business undertaking are (1) the partnership known as a joint-stock corporation, with transferable shares; and (2) the trust.

1. As to the joint-stock company or partnership with transferable shares, the facts have been summarized by Sir Nathaniel Lindley with such clearness and authority as to render unnecessary any different statement. He says : —

‘Upon the whole, therefore, it appears that there is no case deciding that a joint-stock company with transferable shares and not incorporated by charter or Act of Parliament, is illegal at common law; that opinions have, nevertheless, differed upon tills question; that the tendency of the courts was formerly to declare such companies illegal; that this tendency exists no longer; and that an unincorporated company with transferable shares will not be held illegal at common law, unless it can be shown to be of a dangerous and mischievous character, tending to the grievance of her Majesty’s subjects. The legality at common law of such companies may, therefore, be considered as finally established. . . .

‘If these propositions are assented to, it will, it is conceived, be found impossible to establish the illegality at common law of unincorporated joint-stock companies with transferable shares.

‘To say that such a partnership is illegal, because it assumes to act as a corporation, is untrue; for none of the above acts are characteristic of corporations. What distinguishes corporations from other bodies is their independent personality; and no society which does not arrogate to itself this character can fairly be said to assume to act as a corporal ion. Besides this, it is by no means clear that it is illegal at common law to assume to act as a body corporate.’

This statement, of course, is as to the common law unmodified by any statute of prohibition. The idea was familiar also to the civil law and to the canon law under which flourished unincorporated associations of persons not merging or losing the individuality of their participation, but joining in a common undertaking. Such an association was termed societas, as the collective name for its members, who were called socii, and required no express governmental sanction.

These voluntary associations grew and multiplied in England through the favor of the trading-community, until the passage of the notorious Bubble Act of 1719, which declared such associations to be common nuisances and indictable as such. The futility, if not the folly,of such legislation, absolutely prohibiting a natural development of an honest commercial instinct and convenience, had become clear in 1825, when Parliament unconditionally repealed the Bubble Act, after a century’s experience of its demonstrated ineffectiveness.

The only real inconvenience to the members of such voluntary associations was the liability of each member or partner for all of the debts of the joint undertaking.

2. This inconvenience, however, was avoided, and substantially all of the benefits secured, by the ingenious invention of the other form of voluntary association, briefly termed the Trust, which continues to the present day, and which is tolerated tacitly even by the Sherman Anti-Trust Law, except when operating as a monopoly or in restraint of interstate commerce. This form of association is constituted by an agreement investing certain persons designated as trustees, and their successors, with certain property, and powers specified in respect thereof. It possessed, and still possesses, all the advantages of a corporation excepting existence for an indefinite period, which, however, is impossible only because of statutes which may be described generally as prohibiting perpetuities. Trusts of this kind are familiar in respect of real estate in Massachusetts, and were recognized by the United States Supreme Court, in the case of Eliot v. Freeman (220 U. S. 178), as not being corporations, and as exempt from the Federal corporation tax.

This particular discussion has been carried into this detail as a basis for the conclusion that the ground of state interference with corporations is not that the so-called characteristic features of corporate activity could have developed only by express grant from some government, which in virtue thereof was entitled to exercise over corporations a control not deemed reasonable in respect, of natural persons. Without now disputing that such control may be exercised, it is desirable to eliminate a general and erroneous idea as to the foundation of this generally exercised power.

From this point we may proceed to consider those artificial persons strictly and accurately called corporations, which, until the nineteenth century, existed in common-law jurisdiction only by prescription or by special grant from the state, either the sovereign or the legislature. The essential features of a corporation, those which distinguish it from every other form of association, have eluded analysis and definition despite pursuit and insight by the keenest and most untiring of human intellects. One test after another has had to be abandoned as insufficient or indiscriminate. To-day, about the nearest approach to general agreement is that the essence of a corporation consists in a capacity: (1) To have perpetual (or definite) succession under a special name and in an artificial form; (2) to take and grant, property, contract obligations, sue and be sued by its corporate name as an individual; and (3) to receive and enjoy in common grants of privileges and immunities.

Mr. Taylor has undertaken to indicate the points of corporate character which are lacking in an ordinary partnership, but is obliged immediately to recognize that not all of these points distinguish all corporations. He says, —

‘An ordinary partnership dilTers from a corporation at common law in the following points: First, it is not an artificial person; secondly, a change of partners dissolves the firm; thirdly, the partners are personally liable for all firm debts; fourthly, they are each other’s agents in respect to the firm business; and, fifthly, a partnership requires no special sanction for its existence.

‘Not all of these points of difference remain to-day. It is no longer clear that a corporation is a distinct person; and, as to the ihird of these points, it may be said, that in many corporat ions the members are personally liable, and that in some limited partnerships not. all the partners are personally liable.’

It cannot be doubted, however, that in America the general (though not the unanimous) opinion is that expressed by Mr. Machen, ‘ (1) that a corporat ion is an entity distinct from the sum of the members that compose it, and (2) that this entity is a person.’

Mr. Machen happily illustrates his first proposition by invoking the figure of Alma Mater.

‘ Was there ever a school-boy who had any difficulty in understanding that his school is something distinct from the boys that compose it? He does not need to be told that the school may preserve its identity after a new generation of boys have grown up so that not a single pupil remains the same, and though every teacher may have changed, and though the school building may have moved to a different location. He finds nothing strange or mystical in the conception of the school as an entity.’

This recalls Judge Cowen’s quotation of Heraclitus: ‘One cannot step into the same river twice’; and of Aristotle: ‘The river retains the same name although some water is always coming and some going.’

The truth is that from the twilight of our tribal ancestors men have acted in groups rat her than separately, and that they have conceived of these groups as distinct entities.

Mr. Machen’s second proposition, that a corporation is a person, is reasonably explained by him in its popular sense, ‘as a metaphor to express the truth that a corporation bears some analogy or resemblance to a person, and is to be treated in law in certain respects as if it were a person or a rational being capable of feeling and volition.’

The point is of more than academic interest for, under the Federal Const itution, rights of great consequence have been recognized as belonging to corporations as being persons within the intendment of one article, and have been denied to them as not being persons under another article.

But, despite philosophic differences of the doctors, the shrewd common sense of the business world at the beginning of the nineteenth century came to recognize the practical advantages of statutory authority for a corporation with a distinctive name and definite capacity, even though it was possible to obtain and to exercise all this under more or less complicated voluntary agreements.

The American war for independence involved a revolt, not only against the rule of Britain, but also against concessions of special privileges, and naturally enough American sentiment first developed the idea of ‘free-for-all’ acts of incorporation.

The model statute of this kind, which it. is believed was the first of the kind in the world, was, ‘An Act relative to incorporations for manufacturing purposes,’ passed by the legislature of New York on March 22, 1811. This statute, consisting of only eight sections and eighty-seven lines, was a model of its kind in the skillfulness, comprehensiveness, and conciseness of its expression. It permitted any five persons, by making and filing a certificate, to form a manufacturing corporation with a capital not exceeding one hundred thousand dollars.

This general incorporation act was followed by one in Massachusetts in 1836, one in Michigan and one in Connecticut in 1837, and one in Indiana in 1838. Since then the world has fallen into line, the English Companies’ Act, called by Sir Francis Palmer the ‘Magna Charta of cooperative enterprises,’ having been passed in 1862.

These general laws terminated the era of monopolies and special privilege, for, as observed in 1819 by Chief Justice Spencer, —

‘There is nothing of an exclusive nature in the statute; but the benefits from associating and becoming incorporated for the purposes held out in the act are offered to all who will conform to its requisitions. There are no franchises or privileges which are not common to the whole community. In this respect incorporations under the statute differ from corporations to whom some exclusive or peculiar privileges are granted.’

More acutely it has been remarked by Mr. Morawetz that, ‘The right of forming a corporation, and of acting under the general incorporation laws, can be called a franchise only in the sense in which the right of forming a limited partnership, or of executing a conveyance of land by deed, can be called a franchise.’

Under these enlightened laws, as said by Professor Maitland, ‘ It has become difficult to maintain that the state makes corporations in any other sense than that in which the state makes marriages when it declares that people who want to marry can do so by going, and cannot do so without going, to church or registry. The age of corporations created by way of privilege is passing away.’

And so it is; the ordinary business corporation of the present day is the creation, not of the state, but of the subscribers who, except for statutory prohibition, could unite by simple mutual agreement, embodying therein substantially all of the miscalled sovereign franchises.

Thus we are brought to the point where we may answer our question as to the essential relation of the presentday business corporation to the state, by saying that generally it; is the same as that which mutual contractors bear to the register of their contract; and that it is not that of the clay to the potter, or of the offspring to the parent.

The consequences of the sovereign power’s relaxation of its prohibitions upon liberty of such mutual contracts have been stupendous, and of enormous public advantage; for, as profoundly observed in 1839 by Mr. Ingersoll, in his argument in the Bank of Augusta v. Earle, —

‘No corporation is created in contemplation of law but for the public good. Charters are intended to benefit the unincorporated more than the incorporated.’

Obviously, for, except in the degree that it ministers to a public want, no business corporation can operate with financial profit.

At the beginning of the nineteenth century there were in America probably not more than one hundred corporations, ot which at least one half were in Massachusetts. By the year 1840 Chancellor Kent observed that corporations had multiplied with a flexibility and variety unknown to the common law. He says, ‘The increase of corporations in number, and of private industry and enterprise, has kept pace in every part of our country with the increase of wealth and improvement. The Massachusetts Legislature, for instance, in the session of 1837, incorporated upwards of seventy manufacturing corporations.’ In 1857 Judge Dillon remarked that, ‘It is probably true that more corporations were created by the legislature of Illinois at its last session than existed in the whole civilized world at the commencement of the present century.’ In the fiscal year 1909, according to the report, of the Commissioner of Internal Revenue, there were in the United States 262,490 corporations of all kinds, with more than $84,000,000,000 of stock and bonds and $3,125,000,000 of income, paying a Federal tax of about $27,000,000. For the fiscal year 1910-11 the figures had risen to 270,000 corporations with more than $88,000,000,000 of stock and bonds and $3,360,000,000 of income, paying a Federal tax of $29,432,000. As the total wealth of the United States has been cstimatedat $125,000,000,000, it would appear that nearly two thirds of it is held by corporations. More than one fifth of the tax payments were made by 32,925 corporations of New York.

These figures proclaim in trumpet tones the public usefulness of the business corporation, but not more significantly than the following glowing words from the eloquent address of President Nicholas Murray Butler before the New York Chamber of Commerce on November 16, 1911: —

‘I weigh my words, when I say that in my judgment the limited liability corporation is the greatest single discovery of modern times, whether you judge it by its social, by its ethical, by its industrial, or, in the long run, — after we understand it and know how to use it, — by its political, effects. Even steam and electricity are far less important than the limited liability corporation, and would be reduced to comparative impotence without it. Now, what is this limited liability corporation? It is simply a device by which a large number of individuals may share in an undertaking without risking in that undertaking more than they voluntarily and individually assume. It substitutes cooperation on a large scale for individual, cut-throat, parochial competition. It makes possible huge economy in production and in trading. It means the steadier employment of labor at an increased wage. It means the modern provision of industrial insurance, of care for disability, old age, and widowhood. It means — and this is vital to a body like this - it means the only possible engine for carrying on international trade on a scale commensurate with modern needs and opportunities.’

The paramount encouragement for the growth of corporations has been acutely stated by Professor Taussig, as follows: —

‘Perhaps the most important of all the ways in which corporate organization has promoted the development of industry has been the ease of investment, and the consequent stimulus to the saving and the making of capital. In the eighteenth century almost the only possibility of investing in securities was through the purchase of public obligations; and these, though they meant investment by the individual, usually brought no increase in the community’s capital. . . . The ease of investment in corporate enterprises has stimulated savings, and by a reciprocal influence, the increasing accumulation of savings has made possible an immense increase of real capital under corporate management.’

This statement receives recent and impressive confirmation in the distribution among more than 100,000 stockholders of the United States Steel Corporation, of the steel and iron industries, held only recently by a few hundred concerns. The great and lucrative industries known as the Carnegie Steel Works were held by only forty partners.

English experience has been similar to that in our own country. There the companies have been increasing at the rate of more than four’thousand a year. In 1910 they had reached 40,000, with a capital and bonds of more than twelve billion dollars, and an increase in much greater ratio in the number of shareholders.

Now we may consider what has been, and what is, the customary attitude of the government and the public toward these voluntary instrumentalities of the trading community, which are thus recognized to have been advantageous to the public in a degree unattained by any other human agency.

The governmental disposition shows itself first, and most fully, in the exercise of the taxing power. The home state, each foreign state in which the corporation does business, and the United States, all find an easy mark in the identifiable and conspicuous capital of the corporation. The home state, as imagined creator, exacts enormous payments: (1) For the privilege of registration; (2) for the privilege of continuing existence; and (3) for the privilege of permitting the transfer of its shares by the holders thereof, or from the estates of deceased holders. The foreign state, exhibiting the spirit of comity which alone permits what in effect is the migration of the corporation, levies an entrance fee, and sometimes also an annual tax. The Federal government, concededly lacking any power of registration inherent in the creator of the state corporations, levies a tax, not upon them or their property or their income, but a tax, measured by their income, upon the privilege of doing business as corporations, such privilege existing under the laws of the several states, not of the United States.

These taxes are over and above, and in addition to, the ad valorem property tax which the corporations pay just as natural persons do, save that, unlike natural persons, in the assessment of their property the corporation officers are not allowed to deduct, but often are compelled to add, the amount of their bonded indebtedness.

A second important discrimination against corporations is that which takes them out of the protection of the Fourth Amendment and the Fifth Amendment to the Federal Constitution, These two amendments forming part of the Bill of Rights have been regarded as the bulwarks of protection for natural persons. But it seems now to be the established law that in every case the creating state, and, in cases involving commerce between the states, or foreign commerce, the Federal government, are free from most if not all of the prohibitions of these two guarantees of security of the people in their persons, houses, paper, and effects against unreasonable searches, and against compulsory examination as witnesses against themselves in criminal cases.

A third disadvantage of a corporation relates to its transactions outside of its home state.

Under the luminous and far-reaching opinion of Mr. Chief Justice Taney in the Bank of Augusta v. Earle, corporations would be entitled to enter any state, and to transact business therein, unless expressly forbidden by the law of that state, or of the state of its origin. This privilege, guaranteed by Section 2 of Article IV of the Federal Constitution to natural persons, citizens of the several states, has been substantially curtailed (except in respect of interstate commerce) by statutes, more or less restrictive, in nearly every state. This right of exclusion may be exercised so as to disenable a foreign corporation to exercise its right as a citizen of its home state to remove to a Federal court a suit brought against it in the foreign jurisdiction. Thus has resulted a great practical difference to the corporations as compared with natural persons in the exercise of untrammeled action in the several states.

A fourth restriction, almost without limit in the field and the force of its operation, is imposed by the so-called anti-trust laws of the several states. The great business enterprises of the country since the Ohio dissolution of the Standard Oil Trust in 1892 have been conducted not under trust agreements, but by corporations, and therefore, it is the large corporations that have felt the special force of these statutes. So far as they are intended to protect the communities against monopolistic practices tending to prevent reasonably competitive conditions in trade, or to protect and to punish oppressive or unfair conduct, they must be accepted as within the exercise of the state’s right of reasonable legislation. But when, as recently, the courts of a state felt themselves compelled by law to exclude from the state the International Harvester Company solely because of its constitution, and in spite of their judicial ascertainment that its conduct in that state had never been oppressive or injurious, but on the contrary highly beneficial to the people, it is permissible to doubt whether such a statute really embodies a just and reasonable conception of the function of positive law as distinguished from natural law.

Anti-trust laws have been enacted in more than two thirds of the states, which, perhaps, are to be swallowed up by the Sherman Anti-Trust Law and legislation supplementary thereto, passed or proposed for passage by the Congress. The penalties — civil and criminal — imposed by such laws often are more severe than those directed against offenses involving infractions of the Ten Commandments or of the laws of nature.

Juries hesitate to enforce such penalties personally against officers of the very same corpdrations whose practices they are willing to condemn. Laws of somewhat similar import long prevailed in England, but after centuries of unsatisfactory operation were swept away by the repealing acts of 1772 and 1844, on the express ground that the prohibited acts had come to be considered as favorable to the development, and not in restraint, of trade. To-day no statutes of the same purport or effect are to be found in any civilized country except the United States. It would be idle to pretend that these laws do not represent a real and honest conviction of the American people, that they are necessary for protection against real or imagined abuses; and undoubtedly corporations must conform to them. No form of business or social activity is comparable in importance with obedience to the law. Until, as is inevitable, these laws shall be modified so as to apply in respect of evil practices, rather than the mere potent iality of such practices, a modus vivendi must be established. In the mean time it cannot be gainsaid that, for the common good or otherwise, they must operate as a check upon the growth and development of corporate enterprise.

But the fifth, and the greatest burden upon the corporations is that imposed, not as a result, of governmental laws or regulations, but by a popular indisposition to accord to corporat ions the same kind or measure of justice that is deemed to be due to natural persons. The concrete form and the visible and imagined possessions of corporations expose them to impositions which no jury or community would think of inflicting upon individual suitors or citizens. Themselves incapable of sentiment, corporations seldom elicit sympathetic treatment from others. Many years ago an eminent English barrister gave expression to the experience of most corporation lawyers, before and since, on both sides of the ocean, when he declared that, except in the clearest of cases, a corporation had small chance of a favorable verdict.

No corporation can expect any jury to treat it like an ordinary personal suit or. One result of this discrimination undoubtedly has been unfortunate in its effect upon the administration of justice, or upon the popular feeling with regard to that administration. The errors of prejudiced or unreflecting juries have required, and they have received, correction from courts of review so frequently as to lead to a popular impression that if juries are biased against corporations, judges are biased in their favor. It is no part of the present discussion to demonstrate that such an impression is wholly erroneous, though there is far less reason for it than is often declared. The right of the corporation to even and approximately exact justice is, of course, as sacred as that of any private suitor. Whenever such right is denied, corresponding injury is inflicted upon a form and mode of honest business enterprise which, as we have already observed, is regarded by men of wisdom and experience as the greatest social achievement of the nineteenth century. Thus a serious loss results to society itself.

The corporation is entitled to receive no more and no less than the justice due to every citizen. So long as such measure of justice is denied by juries or by commissions, the aggrieved corporation is bound to seek, and should receive, just redress in the courts. To pillory either corporations for seeking, or courts for awarding, remedial justice in accordance with the principles and procedure laid down for all citizens is not only unpatriotic and unfair, but is also unwise. For so long as the instinct of self-protection animates human nature, impatient and conscienceless men, in charge of properties, whether corporate or personal, will resort to abhorrent methods if they distrust, or have reason to distrust, legitimate modes of defense. This, like ‘lynch law,’ may be condemned, but the fact cannot be ignored. The effort of every reasonable man should be to contribute his influence toward the fair treatment, of industrial enterprises in every form, whether individual or corporate, according to their merits and demerits.

It may be answered, and with considerable force, that in the long run men and institutions receive the kind of treatment that their conduct provokes or invites. But, as already noted, in the case of corporations, their impersonality, invested in the popular imagination with inexhaustible resources, seems to relieve the community from extending to them any measure of that patient consideration which in many difficult cases is the safeguard of the personal litigant. A single illustration may indicate how remote and irrelevant may be the prejudices governing the result in the trial of claims against corporations. An eminent southern lawyer told me that one of his earliest cases was against a telegraph company for negligence in the transmission of a message. Having succeeded by his evidence in establishing his point, his satisfaction in his achievement as a forensic victory was considerably modified when the foreman of the jury told him, ‘We found for you because we are against these corporations: they make people superficial.’

The temper of the times which now we are passing through, also contests the reasonable development of corporate enterprise. As already observed, a chief public advantage in the process of corporate organization has been found to be in the opportunities generally afforded for the investment, and the making, of capital by the investor of moderate means. But, in an era of vast and growing discontent with capital in any form, t here is also a growing disposition to question whether the public service rendered by corporations in this particular has not been overestimated. This suspicion openly and boisterously expressed by the avowed socialistic organs undoubtedly lurks in the minds of many not yet. prepared to wear the label of the Socialists. Their attitude, however, is reflected in many forms of governmental enactment and administration adopted in supposed response to this popular unrest, or in expectation of popular approval.

For this difficulty there is no reasonable remedy comparable with the remedy of reasonable and patient discussion. The principles of our popular government by representation are sound, or they are unsound. To many of us they seem as sound as when they were adopted in 1789, and our constitutional guarantees are entit led to veneration and maintenance, not merely because they are venerable (though that means much), but because in the main they are right, and are such as, if not already ordained, should now be ordained by the people of the present day.

That the initiative, the referendum, and the recall, as measures of federal concern, are beyond the domain of present practical politics seems to have been recently recognized by Mr. Bryan and by Colonel Roosevelt , and so far as I know, the contrary has not yet been asserted by any important leader of public opinion. That the applicability of these expedients for ascertaining the popular will in particular instances within the jurisdiction of a state, is very limited in extent, must also be recognized. As methods of reform within these limits, they are only methods and not principles. They do not in and of themselves make men good, but are devised to permit the good to exercise a more direct influence. Their practical operation within the jurisdictions that have adopted them will demonstrate before long whether those who advocate them have seen a great light or only an ignis fatuus. But certainly as yet the measures are in the experimental stage. Equally certainly it is not the part of prudence, in advance of the ascertained result of these experiments, prematurely to commit our communities generally, and with inconvenience of withdrawal. The sober second thought of the people surely is as valuable as its first impression, and this sober second thought is that which must be sought and be stimulated by the reasonable discussion which we are certain now to have. The grand debate has begun in every public forum, by every leader of public thought, throughout our forty-eight states; and in the youngest of them, most vociferously of all.

Sooner or later the debate turns upon the necessity of checking and correcting the ills of corporate management. These ills are of two-fold character: (1) those inflicted on the members of the corporation; and (2) those inflicted on the outside public

1. As to the ills of the first class, the derelictions or usurpations of directors, it is to be observed that such ills are such, and such only, as may be practiced by any trustee upon his beneficiary. My own observation is that as to such breaches of trust, the law of corporations and the correction by courts of equity, and criminal courts, are far more specific and more comprehensive than usually obtains in cases of personal trust.

The accountability of directors, the exhibition of their proceedings, the fidelity of their conduct, is enforced by an abundance of statutory provisions, and by judicial precedents, — civil and criminal, — for which there is no equivalent in the conduct of ordinary business. Here at least the referendum is in full force when the directors periodically appeal for the shareholders’ votes. The fact that generally the proceedings of the directors are confirmed, indicates that in the main the stockholders are satisfied. Such is also the conclusion of Professor Taussig, who says: —

‘It is but just to add that corporate management has often shown a high regard for the duties of directors and officers, especially in the case of those companies of moderate size in which, as has just been said, public opinion is still strong in condemning bad faith, and almost invariably even in corporations of the most miscellaneous ownership, the rights of the shareholder who is duly registered on the books are scrupulously respected. He gets the benefit of every accruing profit, of every windfall, however ignorant or incompetent he be in the details of management. This sort of regard for the shareholder indeed is a sine qua non of corporate investment. . . . Without the certain maintenance of the mechanism for carrying on the agreed operations, the whole fabric of corporate investment would collapse.’

This statement of Professor Taussig accords with my own long-time personal experience. In the hundreds of board meetings attended by me, there always has been apparent the most earnest desire faithfully to observe the law, and impartially to conserve the interests of all the stockholders. It would be difficult to overestimate the value of the unpaid service rendered at much risk of personal loss by directors to stockholders, who receive their periodical dividends without often reflecting that these are the results of the most attentive service by directors. The officers receive censure for failures, and but little credit for success. In general estimation the profits are made automatically by the company, while the losses are due solely to the management. If a prevalent disposition to magnify the burdens and the risks of directors were to be carried to a point where men of responsibility should be unwilling to serve, the resultant loss to the public would be most serious.

The virtue of loyalty to the corporation and its stockholders indeed is magnified to a degree hardly conceivable by those who are not practically familiar with the careers of thousands of employees of corporations whose lives have been devoted to the service of an organization which to them becomes an object of devotion, not unlike the church or the political party or the army or the navy, to which they may be attached. Whatever is necessary for the advancement of the interests of the corporation which they may be serving at a fixed and even meagre salary, insusceptible of increase by their action, arranges itself under the category of the absolutely necessary, justifying for its attainment a disregard of other obligations. Many of the encroachments upon the public right, and most of the transgressions of the prohibitions of the public or the moral law, have resulted from the excess of this virtue of loyalty to the corporation, by officers who had not a penny to gain or to lose by the result of their activities in these particular directions.

2. For the protection of such overzealous officers against themselves; for the protection of superior officers and directors who have no desire to be compromised or misrepresented by any sinister proceedings; for the security of innocent and unsuspecting stockholders; for protection against corporate wrongs of the second class, those against the public, no remedy is comparable to, nor is any more desirable than, that of suitable governmental supervision, through the system of commissions now steadily developing. Theoretically, governmental interference of this kind may seem to some to be unduly meddlesome, and beyond the limit of public right. Practically, however, it is of saving benefit, not only to the public, but to the corporations themselves attaining dimensions that strain the attention of their own officers. The experience of great common carriers under the Interstate Commerce Act of 1887; of the banks; of the insurance companies; and of the public-service corporations under the legislation of the states, justifies the belief that the great trading companies also may find support and strength through the measurable application of corresponding public supervision.

Of course, the conditions of general trade will not allow the same kind of governmental regulation as the operations of a common carrier; but the companies will be fortified, and not injured, by reasonable requirements as to visitation by public officers. The positive provisions of the law concerning corporations are fairly abundant; but as in the case of those for the preservation of the peace and the observance of moralities by private persons, habitual conformity to the law is powerfully promoted by the mere existence of the police force, even though it be called upon rarely to exert its power. The mere existence of a governmental commission would tend in advance to prevent the occurrence of wrongs, which in every sense is better than their detection and punishment. The leading companies should be, and I believe they are, prepared to accept the appointment of trade commissions, both in the states and in the Federal union. No better buffer could be devised for absorption or avoidance of the shocks between the corporations and an impatient or critical public.

The desirability of a governmental commission as to interstate trade has been indicated by both President Taft and Colonel Roosevelt, and more specifically a month or two ago, by the Commissioner of Corporations. As the Commissioner observes, ‘no judicial machinery is adapted to handle this novel problem.’

An Interstate Trade Commission is the subject of an interesting bill prepared by Mr. Victor Morawetz for the Senate Committee on Interstate Commerce, which has just published it.

Of course no governmental commission should be invested with the power to fix prices, or to interfere more than shall be found necessary to secure fair practices and freedom from monopoly. Reasonable publicity should be secured, but without unnecessary injury to trade secrets. During the earlier stages of development every trader, corporate as well as personal, is entitled, and must be allowed, to withhold lawful processes and methods from the knowledge of competitors. It often happens that it is in the preservation of his trade secrets that the small trader finds protection against powerful rivals, and it would be contrary to sound public policy to permit unreasonable intrusion into such matters of merely domestic concern.

How much the small trader needs the protection, not only of trade secrets, but even of legalized monopoly under the form of patents and copyrights, has been indicated very recently by the National Board of Trade of Washington, D. C., in a public statement vindicating the decision that the Dick Mimeograph Company had the right to insist that users of its machines should buy only such ribbons therefor as were made by the Dick Company. The Board of Trade held that this decision was helpful to the small manufacturers, specifically as follows: —

‘To-day the concerns which are combating the great combinations, the only concerns which can successfully combat the great combinations, are those which are protected by the patent law. But for the patent law there would be but one printing-press company, one typewriter company. But for the patent law the monopoly of wealth wrould be complete, and the opportunity of inventive genius now protected would be hopelessly stifled.’

Any governmental commission might well follow the general course indicated in the admirable report in November, 1911, of the Railroad Securities Commission appointed by President Taft, of which the chairman was President Hadley of Yale University.

This report points out, in terms applicable in respect of corporations generally, the embarrassments likely to result from any action tending to discredit issues of railroad securities already outstanding; the disadvantage of compelling railroad corporations to issue bonds at a discount through the requirement that stock shall have a par value and shall be issued for not less than par, and the advantages to be gained from statutory authority to issue for its market value stock without any nominal or par value. A statute to this effect in respect of business corporations just passed in New York offers the opportunity of issuing stock certificates for aliquot interests in the corporate capital which shall bear no dollar mark, but shall indicate only a proportionate interest in the capital stock. It is hoped that this may result in relieving a public misapprehension, and possible public injury, from what is termed stock-watering. This reform has been under way since 1892, and has been urged especially by the New York State Bar Association.

Another feature in the development of business corporations which has aroused considerable suspicion is the so-called holding company, that is, a corporation which itself transacts little or no trade or manufacture, but which holds a majority or more of the stocks, and thereby the control, of other companies engaged in such trade or manufacture. Notwithstanding an impression to the contrary, such a holding of stocks is permitted by the common law as applied in England, and by several of the American courts, though not generally in the United States. Accordingly, express permission to this end has been given by the legislatures of many of the states and, despite popular misapprehension, these laws have not proved of public injury. In 1909 Judge Noyes wrote: —

‘At the present time the tendency seems to be toward an extension of the power of corporations to hold shares in other corporations. . . . This tendency is in the right, direction. Holding stocks to prevent competition is against public policy. But with this and other appropriate limitations the general powers of the modern business instrument — the corporation — should approximate those of the individual. The occasions for corporate stockholding have increased with the increase of corporations. Statutes granting and defining the power to hold stock cannot but be regarded as desirable.’

Among the ‘appropriate limitations,’ probably should be one for the protection of those holders of the stock of subsidiary companies who are denied an opportunity to sell their stock upon terms as fair as those offered to the so-called majority holders. But absolutely to forbid a corporation to acquire, from willing vendors, stocks representing a legitimate business extension, would compel resort to some other expedient for accomplishing the same end. Companies, or their properties, could be brought under common control by consolidation, or, as in the case of national banks forbidden to purchase bank stocks, by the dissolution of one corporation and the sale of its assets to the other corporation. Statutes prohibitory of acts not essentially immoral are apt to reveal inherent insufficiency for the accomplishment of their imagined purpose.

For the maintenance of honest business dealings by the corporations, the government should provide laws of the same character as those applicable in respect of similar business under the conduct of natural persons. For the protection of the community against any wrongs by the directors, or by officers of corporations, the punishment should be inflicted not upon the corporation, including its innocent stockholders, but upon the offending officers; for, as Governor Wilson justly has observed, ‘ Guilt is personal and not corporate.’ To this end the enactments of government should be such as accord with the moral sense of the community, and not disproportionate to injury inflicted upon the public. Otherwise, juries will not convict. For the proper protection of the stockholders and the creditors of corporations against officers and directors,existing provisions of law, and precedents in equity, go as far as it is possible for language to go. The impartial and consistent enforcement of reasonable laws upon lines and within principles already recognized, will represent and embody the just relation of the republic to the industrial corporation; two species of the same genus, the one political and the other economic, and each in its way representing the greatest advance in our modern civilization.

Most of the difficulties could be resolved by the guidance of a reasonable commission such as now proposed. Indeed, we may sum up the whole matter, and may answer the inquiry as to the proper relation of the government to the corporation, in our conclusion that not necessarily as creator or patron, but in the old sense of visitor, the appropriate government should provide for the great corporations, as businesses, suitable supervision and administrative regulation to forfend public injury, without denial of reasonable opportunity for just and honest enterprise.

The commission idea undoubtedly would have been abhorrent to most of the publicists of the laissez-faire school, but since 1870 the progress of governmental interference everywhere has been general and uniform. The state, personified not as monarch, but as parens patriæ, has ceased to devour its children and seeks to nourish its sons and its daughters. No one now would revert to conditions permitting the sale of Hessian mercenaries to die in alien strife. Few now would dispute the right of the government to keep open for its dependent citizens a way of escape from degradation. Stolid indifference to the welfare of those untaught to protect or to improve themselves, is a greater evil than paternalism, though this must not be carried to the point of pauperizing the people. To preserve a just attitude both toward the industries of the self-sustaining, and toward the helplessness of the incompetent because of ignorance, is not an easy task. Neither is it beyond the power of a civilization which is called Christian. The most reasonable and hopeful approach to this general amelioration may be found through the state’s observation and fair regulation of its kindred entity, the corporation. In this process there may be developed in each at least the similitude of a soul.