■^\\\ 
 
 ^ 1 ' 
 
THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 
 FROM THE LIBRARY OF 
 
 PROFESSOR 
 CARL COPPING PLEHN 
 
 I 867-1 945 
 
Digitized by the Internet Archive 
 
 in 2008 with funding from 
 
 IVIicrosoft Corporation 
 
 http://www.archive.org/details/businessorganizaOOrobirich 
 
BUSINESS ADMINISTRATION 
 TEXT BOOKS 
 
 Business Economics. 
 Business Organization and Management. 
 Advertising and Salesmanship. 
 Trade and Commerce. 
 
 Transportation. 
 
 Money, Banking and Insurance. 
 
 Investments and Speculation. 
 
 Accounting. 
 
 Auditing and Cost Accounting. 
 
 Business Law and Legal Forms. 
 
BUSINESS 
 ADMINISTRATION 
 
 THEORY, PRACTICE AND APPLICATION 
 
 Editor-in-Chief 
 
 Walter D. Moody 
 
 General Manager, the Chicago Association of Commerce, 
 Author, "Men Who Sell Things." 
 
 Managing Editor 
 
 Samuel MacClixtock, Ph. D. 
 
 Editorial and Educational Director, 
 La Salle Extension University 
 
 This Zi'ork is especially designed to meet the practical every-da\ needs of 
 the active business man, and contains the fundamental and basic 
 principles upon leliich a successful business is founded, con- 
 ducted and maintained. To those looking foncard to 
 a business career, this work forms the basis 
 for a practical and systematic course in 
 "Business Administration" 
 
 published by 
 la: SALLE EXTENSION UNIVERSITY 
 
 CHICAGO 
 
Copyright, 1911. 
 ItASAlAJS EXTENSION UNIVERSITT. 
 
 GIFT 
 
F5i5l 
 
 r^ 
 
 BUSINESS ORGANIZATION AND 
 MANAGEMENT 
 
 fl This treatise has been especially prepared by Mau- 
 rice H. Robinson, Professor of Commerce, University 
 of Illinois. It is supplemented by various articles, 
 such as New Jersey's Corporate Policy by Hon. James 
 B. Dill, Judge Court of Errors and Appeals, Author 
 Business Corporation, etc. ; Organization Corporation 
 and Receiverships, by Thomas L. Green, former Presi- 
 dent New York Audit Company ; by Documents illus- 
 trating Business Organizations ; and by the writings of 
 other industrial organizers and business managers. 
 The work is a modern, popular and authoritative ex- 
 position of all phases of organization and management. 
 It contains many practical ideas on executive and ad- 
 ministrative efficiency in all departments of business. 
 It is also arranged to serve as a quick reference work, 
 and includes a complete table of contents, a compre- 
 hensive index and test questions. 
 
 Walter D. Moody, 
 
 Editor-in-Chief. 
 
 168 
 
INTRODUCTION TO BUSINESS ADMINISTRATION. 
 
 BY WALTER D. MOODY. 
 
 General Manaper, The Chicapo Association of Commerce. 
 Author of "Men Who Sell Things." 
 
 "The recipe for perpetual ignorance is: Be satisfied with your own 
 opinion and content zvith your knowledge." 
 
 This is an era of the greatest commercial ac- 
 
 Business a contest tivity the world has ever known. The devel- 
 
 of wits opment of business is one of the marvels of 
 
 the new century. A few years ago science, 
 
 as a factor in commerce, was little known and less appreciated. The 
 
 amazing advantages to business of intellectual attainments were utterly 
 
 without recognition. Today, however, business has become a contest in 
 
 which the quickest perception wins, thus transforming the counting room 
 
 into a battle ground upon which brain matches brain for supremacy and 
 
 success. 
 
 [\h, that enchanting word, S-U-C-C-E-S-S. It 
 Success — educated does not require a magic key to unlock the 
 enthusiasm door to business efficiency. There is nothing 
 
 mystic, nothing mysterious in the applied 
 method of the really resourceful men in this day of great successes, of 
 marvelous achievements in business enterprise. The sum total is con- 
 tained in two words, words that electrify, nevertheless. EDUCATED 
 ENTHUSIASM. 
 
 The most formidable barrier to progress has 
 Changing conditions always been the senseless opposition of those 
 make to whom it would be of the greatest benefit, 
 
 opportunities Changing conditions are the order of the day, 
 
 for enlightenment has worked wonders. In 
 olden times, a man of affairs was obliged to giiard his property and his 
 loved ones by building a moat around his house and posting sentinels in 
 and around his estate. The time is not long past when, because of preju- 
 dice, perversity or ignorance, many men believed that opportunity knocked 
 only once at any man's door. Today, thanks to deeper insight, most men 
 believe that life itself is opportunity; that the very air we breathe is 
 opportunity ; that each new day presents broader opportunities for accom- 
 
INTRODUCTION. 
 
 pushing more because of better directed energy. This is not alone the 
 accepted dogma of the man who is making his way in the world. It is 
 the creed, doctrine, tenet or religion, whichever you may care to term it, 
 of the great captains of industry everywhere. 
 
 The more successful the man, the more does 
 New ideas count he think, study, plan, as a part of his daily 
 occupation in the development of the affairs in 
 which he is interested. Newer and better ways to get things done is the 
 business standard employed today by successful men in all lines. Only 
 yesterday if a man of genius advanced a new idea, he found himself 
 ridiculed and his innovation opposed on all sides because it was a new 
 idea. Today, it is different. The man of ideas counts in the trend of 
 affairs as he has never counted before. 
 
 Everything has a subjective reason. Progress 
 Must keep step with is acting as a mighty dynamic force in chang- 
 changing times ing men's viewpoint of life and things. Sup- 
 
 pose the stroke oar on a varsity crew, while in 
 a race against an opposing crew from a competitive institution, should 
 suddenly stop rowing in harmony with his associates and begin to row 
 backwards — that crew would not get very far without trouble. Suppose 
 a lawn mower should be reversed and forced to run backwards — there 
 would not be much progress made in cutting grass on that lawn. Varsity 
 crews and lawn mowers must move forward. Business men must ad- 
 vance with the times. 
 
 A great merchant in Chicago tells a good story of his youth. He was 
 a member of a state regiment of militia. On a certain occasion, his com- 
 pany was sent out on dress parade. An old maiden aunt, with consider- 
 able colonial blood in her veins, took much pride in her nephew and his 
 company. While reviewing the parade, she was suddenly heard to ex- 
 claim : "Why, every single man in that company is out of step excepting 
 my nephew." Alost men who fail to get on in the world do not realize 
 that success lies in keeping step — in making progress with changing condi- 
 tions. They generally make the mistake of thinking that the world and 
 everything in it is out of harmony with themselves. 
 
 A business man of successful experience rea- 
 New ideas worth Hzes that ideas — newer and better principles o£ 
 searching for conducting business — are of the greatest value, 
 
 and he also knows that it pays him to search 
 for them. The same old way of doing things cannot longer be success- 
 fully employed month after month and year after year as under the old 
 regime. The business man must be modern, up-to-date. The physician 
 or lawyer finds that to compete successfully he is compelled to search 
 
INTRODUCTION 
 
 without ceasing; in order that he may comprehend the advancement in 
 treatments or procedures. "To the man who fails belong the excuses." 
 
 President James, of the University of Illinois, 
 
 Demand for trained was asked if there was any demand from busi- 
 
 men ness houses for college-bred men. His reply 
 
 was : "The demand has been far in excess of 
 
 the supply since courses in business administration were established in 
 
 our institution seven years ago. Each year has brought many more 
 
 requests than we have men to recommend." Ten years ago President 
 
 James would have been ridiculed for advancing this new idea for the 
 
 establishment of a school of commerce in connection with a university. 
 
 Today, commercial schools are a part of the regularly established courses 
 
 of nearly all of the great universities of our country. Men trained in the 
 
 theory, practice and administration of business will always occupy the 
 
 best positions and will always command the greatest salaries. 
 
 All men fail at times in the accomplishment of 
 
 Value of new ideas satisfactory results in the various enterprises 
 
 in in which they are engaged, without being able 
 
 business emergencies to give an explanation. The principles that 
 
 have been applied successfully for many 
 years seem apparently to have counted for nothing. It is frequently evi- 
 dent that in such cases a very insignificant thing, a mere oversight per- 
 chance, has been the direct cause of the failure. To be able to put the 
 finger on the precise cause of the lack of success in one's method would 
 locate the cause of the disaster. Then it is that a real appreciation of 
 new ideas is fully realized. 
 
 Failure is more often chargeable to a refusal 
 Men paid for what to learn by mistakes how to avoid them than it 
 they know — not is in making them. Experience is a good 
 for what they do teacher, but who can deny the value to be 
 gained in learning from the experience of 
 others, for we cannot all have the same experience or the same view of 
 similar experiences. There are many pathways to success, but the road 
 of ind!vidual experience is narrow and rugged. It is a commonly ac- 
 cepted fact that for every ten dollars a high-salaried man draws, he re- 
 ceives nine dollars for what he knows and one dollar for what he does. 
 On the same basis the successful business man, employing a large force 
 of other men, realizes that his own greatest worth, as applied to his 
 affairs, lies not so much in what he can do himself as how much he can 
 encourage his employes to do. In either case, his own personal knowl- 
 edge is the power behind the throne. 
 
INTRODUCTION 
 
 The man who would secure the largest net re- 
 Knowledge in excess turn from his individual effort in the field of 
 of present needs endeavor, and he who would realize the great- 
 necessary est possible advantage from the efforts of 
 those under his command must, of necessity, 
 possess knowledge — indispensable perception far in excess of the needs of 
 the moment. Discernment, like a bank account, soon runs out if it is 
 overdrawn or if it is not continually replenished. In business the "check- 
 ing system'* of knowledge is the sort of account that pays best — not 
 the "savings account system." Knowledge that is simply corked up and 
 allowed to accumulate cobwebs and rust can avail nothing. The sharpest 
 vinegar is procured by constantly replenishing the old stock with new. 
 
 Reliable statistics prove that only about ten 
 
 90% failures per cent of all people who engage in business 
 
 vs. are successful and make money; the other 
 
 10% moneymakers ninety per cent become insolvent and fail. 
 
 That is, they do not actually encounter the 
 
 sheriff, or go into the hands of a receiver, but they fail nevertheless to 
 
 succeed in the sense of making money, and what other possible reason 
 
 can anyone have for engaging in business if not to accumulate money? 
 
 iWhy do so many fail? Ask any credit man 
 Failures due to lack and he will tell you that it is not because of 
 of intellectual the lack of capital, or other material resources, 
 
 capacity but it is due primarily to a lack of intellectual 
 
 capacity, the sort of brains that dig and work 
 and sweat until they find a way to accomplish things ; brains that go to 
 the bottom of things; brains that are always looking for better results; 
 brains that never abandon a problem until they have found a way to 
 solve it. A friend once told me that he inquired of the manager of a 
 house employing some three hundred traveling men how many salesmen 
 they had. The manager replied, "Three." My friend asked, "How's 
 that? I am told your force of traveling men numbers nearly three hun- 
 dred." "Ah, that is quite different," replied the manager ; "we have two 
 hundred and ninety-seven traveling men, but only three salesmen." 
 Quite likely that manager's estimate was intended to be taken figuratively 
 rather than literally,but it serves to illustrate the fact that in this great 
 United States there are millions of men, young, middle-aged and old, who 
 are content to plod along in a mediocre sort of way, heedless or unmindful 
 of the fact that opportunity, knowledge, possibilities, are calling, calling, 
 calling to them to come up higher. There are hundreds of thousands of 
 other men engaged in business who sit idly by while their trade, like the 
 
INTRODUCTION 
 
 sands in the hour glass, slowly ebbs away, and eventually is absorbed by 
 their more progressive business neighbors. 
 
 There is still another vast army of business 
 Moneymaking and men — salesmen, clerks and wage-earners of all 
 business literature classes — who are beginning to catch a glimpse 
 of the dawning of a new business era, the 
 greatest the world has ever known, an era impregnated with possibilities 
 and opportunities for those who are ready with wicks trimmed and oil 
 in their lamps. To the earnest latter class which is really desirous of 
 profiting by the experience of others, there is no need of elaborating the 
 possibilities embodied in this course of reading in Business Administra- 
 tion. This set of books, containing valuable business data on many sub- 
 jects, thousands of pages telling the story of success illustrated by trained 
 men whose names are respected everywhere, is intended to reach all 
 classes. There is absolutely nothing in print that can even approach or 
 can begin to compare with it in value as a reference library for business 
 men or excel it as a complete course of instruction for any man desirous 
 of making the best of his possibilities and opportunities in the kaleido- 
 scopic age through which the business world is now moving. 
 
 The more practical the ideas, the better the 
 Practical ideas best basis for good work. Not long since, busi- 
 ness men generally pooh-poohed the idea of 
 employing in the conduct of their business anything new, which was taken 
 from the writings and experience of others, such as is contained in this 
 remarkable series, contributed to by some of the brightest minds in the 
 business world today. There is, however, in these days unmistakably a 
 hungering and thirsting for just this new sort of literature. It fills a long- 
 felt need — fills it exactly, completely, satisfactorily. Being the author of a 
 work on salesmanship which has had a countrywide circulation, I hare 
 been literally besieged bv business men everywhere asking me to recom- 
 mend books treating of successful business methods, and have been cha- 
 grined to find how limited was the supply. The man who formerly was 
 prejudiced against such sources of information must now step aside 
 and make way for progress or unite with the popular demand for more 
 education and better methods. 
 
 Show me the man who says he has no pa- 
 
 Cannot afford tience for such things, and I will show you a 
 
 vs. man, like the stroke oar and the lawn mower, 
 
 can afford who does not believe in moving forward in 
 
 progress. Show me the man who says he has 
 
 no time to read of new methods and principles, and I will show you the 
 
 one who utterly fails to perceive that familiarity with business literature 
 
 of this kind means pecuniary advancement. Show me the man who says 
 
INTRODUCTION 
 
 he cannot afford to invest in such a set of books, and I will show you 
 one who apparently CAN afford to waste his energy in misdirected 
 effort — that energy and effort which are to every wage-earner and 
 tradesman both his stock in trade and his invested capital. 
 
 Someone has said, "There are three kinds of 
 Failures people in the world — the Can'ts, the Won'ts 
 
 unnecessary and the Wills. The first fail at everything; 
 
 the second oppose everything; the third suc- 
 ceed at everything-." I would add a fourth kind — the largest class of all 
 — the Don't Trys, the "Oh-what's-the-use," "It-doesn't-interest-me" sort 
 of people. Their name is legion ; their fault is lack of confidence. Knowl- 
 edge is the greatest inspiration of confidence to be found on earth. You 
 may not personally be held in the hope-paralyzing bondage that produces 
 the "Oh-what's-the-use," or "I'm-not-interested" germ, but if you are not, 
 you are exceptional. Most people are, and that is the reason that such 
 persons are just about what luck, good fortune or chance make them, 
 succeeding if fortune favors them, failing if they are left to depend upon 
 their own resources. Result : Nine fail where one succeeds. 
 
 It is very fortunate, indeed, for most men that so much of their happi- 
 ness depends upon success. There is nothing on earth quite so terrible 
 to think of as failure, especially that due to lack of effort, unless possibly it 
 be the failure of a man who lacks the courage or initiative to try to make 
 the most of himself, and thus lets his best opportunities escape him. And 
 this last is really the most pitiful thing that can befall a man. It is well 
 enough to plan opportunities, but if we had the wisdom to take advantage 
 of such opportunities as naturally come to us, results would more often be 
 found in the balance on the right side of the ledger. And so I am of the 
 opinion that a clear explanation of why a very large class of people do not 
 succeed is found in some of these expressions — "I don't care," "I can't," 
 "It doesn't interest me/* or "Oh, what's the use." 
 
 One of the great objects set forth in this 
 Basis of all busi- Business Administration series is to supply the 
 ness success positive energy which begets courage, confi- 
 
 dence, initiative and success. We want to 
 make you feel the necessity of doing some reading, a little plain think- 
 ing, and to make as clear as possible the important things that are in- 
 volved in the serious but very fine game of business. 
 
 With business becoming with each succeeding day more and more of 
 a science, it is high time to understand what is essential to it. Speaking 
 of the subject of "Organized Business," a great authority recently said, 
 "It is time even for business men to understand business." Again, the 
 purpose of this course in Business Administration is, if possible, to meas- 
 ure the power and principles of business, to trace their ramifications, de- 
 
INTRODUCTION 
 
 fine their elements, get hold of their vital fundamentals, and so compre- 
 hend them, both in technical detail and as a mighty unit. And I am confi- 
 dent we have done all this. I find that at the foundation, the machinery 
 of business is simple, but whether it is plain or complicated, all who would 
 succeed must make every efTort to comprehend it thoroughly. All I 
 care to emphasize at present is the great truth that knowledge, estab- 
 lished and classified, is the basis of all business success. This is clearly 
 established in this course of reading, and I am trying to incite your 
 imagination in writing of its merits just as I would endeavor to enable 
 you to realize it if I could talk to you personally right across my desk. 
 The observant man can see clearly the things I am talking about, but to 
 most men the mind's eye perceives not by observation, but only when the 
 imagination is stimulated. So I would stir all men to look earnestly into 
 these things, with a view to their personal betterment. 
 
 Business is far more than business as it is com- 
 OBusiness axioms monly understood. It is a science, and it is 
 simple to the eager, practical minds of business men that 
 
 understand we shall endeavor to convmce first of that 
 
 fact, and our reasons for addressing those 
 principally concerned are especially good. Why? I have found that in 
 writing about business whenever I was able to make the principles so 
 plain that business men understood them, everybody else did, so it is to 
 be expected that if business axioms can be made simple enough for busi- 
 ness men to understand them, everyone will apprehend them. Every- 
 body. l\nd it is everybody that we are attempting to reach. 
 
 For nearly thirty centuries men have recog- 
 
 Knowledgc ia nized the concrete wisdom of Solomon's prov- 
 
 power erb: "A wise man is strong; yea, a man of 
 
 knowledge increaseth in strength." Yet we 
 
 have been slow in making its application universal to the race. But we 
 
 are beginning to understand that the power inherent in knowledge applies 
 
 as well to commercial and industrial as to scholastic, political and social 
 
 life, as well to the counting room as to the pulpit, as well to the shop as 
 
 to the university, as well to the farm as to the bar. Knowledge is power 
 
 and is the only source of real intellectual sovereignty that the Creator has 
 
 ever entrusted to men. 
 
 In conclusion, I would say that these words are addressed to the 
 business men of America, and this designation includes the banker and 
 his clerks, the farmer and his sons, the lawyer and the law student, the 
 financier and the man who sells bonds and stocks, the merchant and his 
 clerk, the accountant and the bookkeeper, the manager and his assist- 
 ants—the ambitious young men of the Twentieth Century type, contem- 
 plating the pursuit of any business, trade or occupation. 
 
CONTENTS 
 
 BUSINESS ORGANIZATION AND MANAGEMENT. 
 
 PAGE 
 
 Modern Business Orjjanization and Management. — 
 
 By Maurice H. Rdbinson 1 
 
 I. Fundamental Principles — 1 
 
 The Nature of Business — Individualistic versus Social Economy — 
 Business Organization — The Management of Business Organizations — 
 Factors of Wealth Production— Business Units— Methods of Conduct- 
 ing Business — Industrial Groups — Political Conditions and Business 
 Organization— Social and Industrial Conditions Affecting Business. 
 
 II. The Organization of Business Enterprises — 28 
 
 / Classes of Organizations— The Individual Proprietorship — The Part- 
 nership — The Articles of Co-Partnership — The Corporation— The 
 Corporate Characteristics— Classes of Corporations— Advantages and 
 Disadvantages. 
 
 III. The Formation of the Corporation — 56 
 Promotion — The Choice of a State — The Process of Formation— The 
 Capitalization— The Charter— Xame of the Corporation— The Object 
 
 or Purpose of the Corporation— The Capital Stock— Other Essential 
 Features — The By-Laws. 
 
 IV. Internal Organization of the Corporation — 84 
 The Bondholders— The Stockholders— Liabilities of Stockholders— The 
 Creditors— The Directors— The Directors as Managers— The Directors 
 
 and the Stockholders— The Directors and Vacancies — Liabilities of 
 Directors — The Corporate Officers. 
 
 V. Organization for Operation — 115 
 The Proprietorship and the Operating Organization — General Prin- 
 ciples of Organization— The Executive— The Single versus the Plural 
 Executive— Responsibility to the Proprietorship— The Function of the 
 Executive— Functional Organization— The Legal Department— The ^ 
 Accounting Department — The Division of Accounts — The Division of 
 Credits— The Division of Collections— The Purchasing Departmcnt-T>^ 
 The Ore and Coal Department— The Manufacturing Department— The 
 Experimental Laboratory— The Drafting Room— The Power Plant— 
 
 The Tool Room— The Shop— The Foremen— The Workmen— The 
 Sales Department^Advertising— Estimating— Selling— Ordering— The 
 '' Brokerage System— The Commfssion House — The Wholesaler— The 
 Retailer— Direct Selling— The Traffic Department 
 
 VI. Inter-Relations of Business Enterprises — 168 
 The Association— The Chamber of Commerce— The Merchants' Asso- 
 ciation — The Illinois Manufacturers' Association — The Combination — 
 Price Combinations — Produce Combinations — Geographical Combina- 
 tions — Combinations for Sharing Business — Combinations for Sharing 
 Profits— The Trust- The Nature of the Trust— Its Disadvantages— The 
 Holding Corporation— Its Structure — Its Control over Subsidiary Cor- 
 porations — The Leasing Company— The Community of Interests— The 
 Merger. 
 
 i 
 
ii CONTENTS 
 
 VII. Business EpFiaENcy — 18<3 
 
 Business Efficiency versus Technical Efficiency — The Cost of Produc- 
 tion — Efficiency in Investment — Plant Location — The Factory — 
 Power, Heat and Light — Investment Accounting — Raw Materials — The 
 Efficiency of Operation — The Labor Problem — The Driving Method 
 — The Piece Wage System — The Bonus and Premium Systems — Profit 
 Sharing — Participation in Ownership — The Pension System — The 
 Problem of Prices — The Problem of Management— The Tests of Effi- 
 ciency — How Accountancy Assists the Management 
 
 Railroad Organization, 
 
 By George T. Sampson 225 
 
 Organization of a Purchasing Department on Railroad Systems. 
 
 By Edward Norton Chilson 244 
 
 The Promoter in Modern Business. 
 
 By Harrison S. Smalley 257 
 
 The Financiering of Trusts. 
 
 By Charles S. Fairchild 276 
 
 The Relation of the Financial Trust Company to the Industrial Trust 
 Company, 
 By L. Walter Sammis 287 
 
 Some Aspects of New Jersey's Corporate Policy. 
 
 By James B. Dill 321 
 
 Corporation Reorganizations and Receiverships. 
 
 By Thomas L, Greene 345 
 
 Dissolution of a Private Corporation. 
 
 By William Allen Wood 372 
 
 Documents Illustrating Business Organization 375 
 
 Quiz Questions 487 
 
MODERN BUSINESS ORGANIZATION AND MANAGE- 
 MENT. 
 
 BY MAURICE H. ROBINSON, Ph. D. 
 
 \r,. L., Dartuidutli College, ISOO; Siiperinteiidcnl Puljlic Schools, Wahpeton, 
 N. D., and Madclia, Minn.. lS'.)()-(i; M. A., Darlniuiith College, 1897; Ph. D., 
 Vale, 1902; As.sistant in I'olitical Science, Dartmouth College, 1897-8; In.structor 
 in Political Economy, Yale, 1899-1902; Professor of Industry and Transporta- 
 tion, University of Illinois, 1902 — ; Special Expert Agent of the Census P.ureau, 
 190.?; Author of Trusts, Yale Review, Nov., 1902; A History of Taxation in 
 New' Hampshire, 1902; The Government Regulation of Insurance, Publications, 
 American Economic Association. 1907; The Legal. Economic and Accounting 
 Principles Involved in the Judicial Determination of Railway Passenger Rates, 
 Yale Review. Feb., 1908; Economics and Accountancy. Publications. American 
 Economic Association. March, 1909; Railway Freight Rates, Yale Review, 
 Aug., 1909; The Holding Corporation, Yale Review, Feb. and May, 1910.] 
 
 I. FUNDAMENTAL PRINCIPLES. 
 The Nature of Business. 
 
 Man was created with wants, some of wliicli can be satis- 
 fied with objects found in the material world. His w^ants 
 increase as they are ministered to and, as he finds himself 
 able to satisfy more and more completely the wants already 
 in existence, new ones are developed. From the beginning, 
 man has been surrounded with materials, furnished by na- 
 ture, more or less ready to supply his needs. A few of such 
 material objects are ready for immediate use and are found 
 at the places whore they are w^anted. In most cases, liow- 
 ever, an expenditure of energy and thought is necessary 
 in order to fit the materials furnished by nature for man's 
 use. 
 
 In the first place, materials in most instances need to 
 be changed in form ; for example, ci'ude rubber grows in the 
 forests of Brazil, but before it can be used it must go 
 through a series of complex processes and finally appears 
 in the fonn of rubber tires for vehicles, and in various other 
 forms whei'o an elastic cushion is needed. Again, iron ore 
 is found fairly well distributed over the earth's surface, 
 
 1 
 
 B— II— 1 
 
2 MAURICE H. ROBINSON 
 
 but before it can satisfy the wants of man it must be con- 
 verted into pig iron and then into rails, axles, car wheels, 
 bridges, tools and machinery. A considerable portion of 
 the earth's surface is covered with growing timber; before 
 such timber can be used by man, however, it must be cut 
 down, sawed into building material, and finally formed into 
 shops, houses, desks, cabinets, chairs and vehicles. Clay is 
 a deposit distributed over a considerable portion of the 
 earth's surface, but it must be transformed into brick, pot- 
 tery, and china ware before it can serve the wants of man. 
 
 In the second place, the materials furnished by nature 
 are not evenly distributed over the earth, and therefore 
 need to be transported from places of the greatest abun- 
 dance to those of comparative scarcity. For example, fruit 
 grows abundantly in Florida and Southern California. To 
 secure its greatest utility, the surplus fruit of the southern 
 states is carried to the eastern and northern markets, where 
 otherwise there would be a relative scarcity of such ar- 
 ticles of food. The steel products from the Pittsburg dis- 
 trict are likewise distributed to all parts of the world. Ijum- 
 ber is transported from the forested areas to the plains and 
 to the cities. This work of carrying materials from the 
 points of the greatest abundance to those of relative scarci- 
 ty is one of growing importance in every civilized country. 
 
 In the third place, fruits, grains, vegetables and manu- 
 factured goods are produced in quantities at certain seasons 
 of the year and need to be stored in order to insure contin- 
 uous use from season to season. This process equalizes the 
 supply from time to time and enables manufactured goods 
 to be kept in stock for the inspection of customers and for 
 their convenience as to the time of delivery. This particular 
 work, while important in itself, is usually conducted in con- 
 nection with manufacturing, transportation, or commercial 
 enterprises. 
 
 In the fourth place, in the modem economic system, 
 goods are exchanged from their original owners, through 
 
MODERN BUSINESS ORGANIZATION 3 
 
 the regular clianucls of trade, to the ultimate eonsiimers. 
 For exaini)le, the wheat c^rowii on the farms is sold to the 
 elevator companies, then to the millers, and the Hour manu- 
 factured from the wheat thus sold is again transferred to 
 the wholesale trade, then to the retailers, and finally to the 
 hake shops and households where it is finally consumed. 
 Real estate in one part of the country is transferred from 
 the control of speculators who have purchased it in the hope 
 of making a profit due to its increase in value, to farmers 
 who cultivate it for the crops that it will produce. All 
 such activities fall into the general class called trade or 
 commerce and have their justification in the better distri- 
 bution of the world's goods resulting therefrom. 
 
 All of the various activities briefly described above are 
 known under the general name of business. Business may 
 therefore be defined as the science and the art of transform- 
 ing, transporting, transferring and storing the wealth furn- 
 ished by nature in order that the material wants of mankind 
 may be more or less completely satisfied. 
 
 Individualistic versus Social Economy. 
 
 It is conceivable that each individual might be assigned 
 all products upon a portion of the earth's surface. He 
 would then have at his hand land, water, forests, ores, clay 
 and other materials which the earth furnishes to mankind. 
 Using the materials at his hand, he could grow fruits and 
 grain ; grind the grain and pick the fruit ; build a hut, spin 
 thread, weave cloth, and thus have all the necessaries of a 
 meager existence. Under these circumstances there \vould 
 be no sale of goods, no ti-ansfer of pro])erty rights; there 
 might be all the processes of a more or less primitive Ui^e 
 of manufacture ; there would be transportation of materials 
 from one part of the farm to another part; there would be 
 storatje of crops from the season of plenty to the season of 
 scarcity. There would thus be a complete individual eco- 
 nomic life with all the various activities which such a life 
 
4 MAURICE H. ROBINSON 
 
 necessitates. There would, however, be no social economic 
 relationships ; there would be business activity, but no busi- 
 ness organization in the ordinary sense of the term. 
 
 Such conceptions are useful for purposes of contrast- 
 ing what might be with the present condition of business 
 life. From the very beginning man has been a social being 
 and has worked out his economic destiny in co-operation 
 with his fellow-man. From the earliest times individuals 
 began to specialize in their work and organize their indus- 
 trial life. Owing largely to natural conditions, some men 
 became fishermen, gathering fish from the rivers and the 
 sea. Others became huntsmen providing the community 
 with the flesh of beasts and of fowls. Others worked in 
 brass and the metals, providing the community with weap- 
 ons of defense, articles of usefulness and ornament. Still 
 others tilled the soil and provided fruits, grain and vege- 
 tables for the common use of the community. Each man 
 thus had more of some one of the articles than he needed 
 and of others, none at all ; hence came an exchange of the 
 surplus products, giving each man in the community a 
 share of the total amount of goods produced. In order, 
 therefore, to effect such transfers it was necessary that 
 trade, commerce and transportation be undertaken by a 
 part of the community. 
 
 Specialization brings those engaged in the same line of 
 business activity into close economic relationships. Thus a 
 group of men find it desirable to build larger boats than any 
 one man could build or sail, and embark on longer voyages 
 in order to find fish of choicer quality or in greater abun- 
 dance. They therefore unite for the purpose of undertak- 
 ing work which no one of them could accomplish working 
 alone. Their economic returns are thus together and some 
 method of division must be devised fairly satisfactory to all 
 parties. Such important matters, a:ffecting directly the eco- 
 nomic welfare of the individuals, cannot be left to chance, 
 and therefore the work and the share of each individual in 
 
MODERN BUSINESS ORGANIZATION 5 
 
 the total pi-odiicts are arranged by the various parties who 
 engage in the enterprise. Such an undertaking must be 
 properly organized and etlQciently managed, to insure per- 
 manence and success. 
 
 Business Organization. 
 
 Organization consists in arranging parts each having 
 special functions to discharge so that their orderly, harmo- 
 nious and efficient direction is made possil)le. This term is, 
 it will be noticed, a very broad and comprehensive one. It 
 applies with equal facility to the organic life of animals, of 
 individuals and of groups of individuals. Thus the race 
 horse is a highly organized combination of chemical constit- 
 uents whose general purpose is to secure both grace and 
 speed. Similarly each individual man is an organized 
 entity, endowed with grace, action and energy, and having 
 in addition the ability to imagine, to remember, to con- 
 struct and to direct. A coach and four, filled with a num- 
 ber of passengers, acting under the impulse of a common 
 idea and guided by the accurate eye and the steady hand of 
 the driver, is an organization of a complex type. A club 
 united by common social bonds and under the man- 
 agement of its officers, is a more complex organization 
 operating for social purposes. The city is a more or 
 less completely organized political unit which fulfills 
 its functions well only when its organization is harmoni- 
 ously developed. The nation is a still more complex type of 
 political organization. The British Empire, for example, 
 with its centralized government at home and its dei)end- 
 encies of various kinds and sizes beyond the seas, represents 
 the most complex type of political organization that has 
 been developed in the world's history. 
 
 The bank, the factory, the wholesale house, the retail 
 store— each is a business organization of a simple type The 
 clearing house, the board of trade^ the national manufac- 
 turers* associations, the railway freight associations, the 
 
6 MAURICE H. ROBINSON 
 
 commercial combination, the trust, the holding corpora- 
 tion, are all business organizations of a more complex 
 character. 
 
 All organizations are formed and conducted for the good 
 of the various constituent members. In the case of a busi- 
 ness organization the object is the creation of wealth for the 
 common good which is afterwards distributed among the 
 several members of the organization. If more wealth can 
 be created by an organization than can be created by the 
 members working individually, the organization fulfills a 
 worthy economic purpose. Whether the wealth thus cre- 
 ated is distributed fairly among the members depends 
 largely upon the character of the organization and the 
 facility with which the several types of organizations can 
 be formed. It is thus of the utmost importance to the 
 social welfare of individuals that the governments under 
 whose authority business organizations are formed place 
 no unnecessary barriers in the path of those who are in- 
 strumental in determining the form which the industrial 
 organization assumes. The evolutionary forces working 
 with peculiar force and efficiency in the business world 
 will, in an upright and intelligent business constituency, 
 insure the dominance and perpetuity of the most efficient 
 and the most equitable types of business organizations. 
 
 The Management of Business Organizations. 
 
 Management may be defined in a general way as the art 
 of conducting an organized body with a given purpose in 
 view for the sake of accomplishing some predetermined 
 end. Business management is, therefore, the art of direct- 
 ing a business organization to secure definite business re- 
 sults. Organization is preliminary to management; it is, 
 however, a necessary stage in business development. More- 
 over, efficient management is largely contingent upon the 
 character of the organization. For example, using an illus- 
 tration from an earlier paragraph, the horses, the coach and 
 
MODERN BUSINESS ORGANIZATION 7 
 
 the passengers must be in haimonious relations to each 
 other to permit efficient management. A larp^e coach, many 
 passengers, and a pair of ponies, would effectively prevent 
 good management. On the other hand, many horses, a 
 small coach and many passengers, would be equally unman- 
 ageable. So in the business world, the organization should 
 be adapted to the work to be performed and all parts of the 
 organization should be in harmonious relationship. Such 
 a condition, while favorable to good and wise manage- 
 ment, does not always insure such a desirable end. The 
 latter comes only as a result of knowledge of the organiza- 
 tion and the object sought, together with experience in this 
 part of the field of business enterprise. Management is, 
 then, first a question of organization, and then of the skill 
 and ability of the manager. The more complex the organi- 
 zation, the more difficult the task of the manager becomes. 
 On the other hand, organizations ought to be as complex 
 as the nature of the work undertaken demands. It is al- 
 ways unwise to attempt to make business problems less 
 difficult by simplifying the organization when the nature of 
 the work undertaken is complex in itself. It is far better 
 to find an able board of managers, one that understands the 
 principles involved and is able to make broad and compre- 
 hensive plans. 
 
 To secure good and efficient management is at once a 
 most difficult and a most desirable task in our business 
 activity. Given an opportunity, that is, conditions where 
 new wealth may be created by business activity, poor man- 
 agement is almost sure to result in business disaster, while 
 good management is almost equally sure to result in busi- 
 ness success. 
 
 Factors of Wealth Production. 
 
 In the organization and operation of every business en- 
 terprise the co-operation of four separate and different 
 kinds of economic elements, commonly called the factors 
 
8 MAURICE H. ROBINSON 
 
 of production, are necessary. These four factors are (1) 
 land, (2) capital, (3) labor and (4) enterprise. The first 
 two are non-human and ordinarily are unable to produce 
 articles of wealth except with the aid of and under the 
 direction of business enterprise. The second two consti- 
 tute the human element, but are separated into two classes, 
 the former supplying the labor force, and the latter direct- 
 ing the conduct of business enterprise. As each of these 
 factors is necessary in business activit}'', it is desirable to 
 explain the nature of each and the special function it per- 
 forms in business affairs. 
 
 1. Land includes not merely the surface of the earth, 
 together with the oceans, lakes and rivers, but all the ma- 
 terials below the surface of the land and under the seas. 
 It also includes the forces of nature, the work of rivers, 
 wind and tides, the effect of climatic conditions, rainfall, 
 heat and cold, winds and storms— in fact, all of the things 
 which nature has furnished for mankind to work with. 
 
 The elements furnished by nature are in a way inde- 
 structible ; however, in the work of producing wealth, while 
 the elements are not destroyed, they are changed in form 
 in such a way that in many cases they do not become usable 
 a second time. Consequently such resources, in the process 
 of wealth production, become more or less rapidly ex- 
 hausted, and in order to secure the greatest possible bene- 
 fits it is necessary to conserve such resources with the great- 
 est possible care. Moreover it is also desirable to use the 
 land and the natural resources for the purposes for which 
 they are best adapted. It would be undesirable, for in- 
 stance, to use land adapted to the cultivation of corn for the 
 production of fruits, or land peculiarly fitted for manu- 
 facturing purposes for residences and recreation grounds. 
 Again, certain kinds of manufacturing require special 
 climatic conditions. For example, the manufacture of cot- 
 ton goods needs a moist climate while the manufacture of 
 flour is more economically conducted in a dry climate. The 
 
MODERN BUSINESS ORGANIZATION 9 
 
 adaptal)ility of the land and the climatic conditions to par- 
 ticular kinds of manufacturing^ of farming, or of (Mun- 
 merce, then, plays an important i)art in connection with 
 the production of wealth. Further, in the niaiiiifacture of 
 goods, power in some form is generally found necessaiy; 
 hence, in the early i)art of the last century, the location of 
 business establisliments on rivers, at j^oiuts where water 
 power could be utilized, and in more recent times, the loca- 
 tion of iron and steel business at points in close proximity 
 to deposits of coal and natural gas. 
 
 The land thus furnishes not only the materials with 
 which man works, but also determines the locations for the 
 site of manufacturing and commercial establishments in 
 which the affairs of the business are carried on; the land 
 also furnishes the sites upon which the houses are built in 
 which the managers and lal)orers live. It has been found 
 that conditions of temperature also are important elements 
 in connection with the production of wealth. The temper- 
 ate climate seems to be best adapted to the development of 
 energy and enterprise; consequently those countries situ- 
 ated within the temperate climatr^ have generally developed 
 more rapidly and have been able to use the resources of 
 nature with greater efficiency. 
 
 2. A second element in production is man himself. It 
 is man's labor and man's productive genius that has made 
 use of the materials furnished by nature and converted 
 them into the utilities which satisfy his wants. Men dif- 
 fer, however, both in their ability to deal with the materials 
 furnished by nature and in the use which they are able to 
 make of such materials when converted into suitable form 
 for human use. The labor power of any community varies 
 in accordance with the knowledge of the individual men, 
 and with the ability of the individual men in their associ- 
 ated capacity to make use of the gifts of nature. The 
 primitive races are generally the subjects of nature and of 
 natural forces. As a result of the growing intelligence of 
 
10 MAURICE H. ROBINSON 
 
 mankind in relation to business enterprise, greater and 
 greater control over nature and natural forces is attained. 
 The progress of civilization from the economic standpoint 
 has been aptly described as a process by which man has 
 been transformed from the servant of nature to the master 
 of nature. This result is attained partly through his ability 
 to create wealth faster than he consumes it, thus enabling 
 him to use the portion that he has saved to assist him in the 
 creation of additional wealth. Natural resources thus 
 transformed and stored by man is called capital. 
 
 3. The formation of capital is thus one of the funda- 
 mental conditions of economic progress. In the first stages 
 this resulted in the formation of tools and weapons of de- 
 fense. The tools were used to assist man in the subjugation 
 of nature and the weapons were used to protect himself 
 against the constant warfare to which he was subjected by 
 hostile races and the dangerous animals and reptiles. The 
 tools gi^adually assumed more and more usable forms and 
 with every stage in the evolution of tools, man became bet- 
 ter able to create and save additional capital to assist his 
 efforts in providing for his increasing wants and adding to 
 his stock of capital. He was thus enabled to provide him- 
 self with shelter and with clothing, and consequently he be- 
 came better able to withstand the hardships of unfavorable 
 climatic conditions and to migrate from the more temper- 
 ate climates to those where formerly he was unable to live 
 at all. 
 
 With the creation of a stock of capital, there came to be 
 a marked difference between those races which were able 
 to make use of capital in connection with the natural re- 
 sources and those less efficient in this respect. Those who 
 were able to make the best use of such facilities became mas- 
 ters over the others in the various tribal warfares that 
 occurred, and the general qualities that had enabled such 
 races to make and save capital also enabled them to pre- 
 serve their supremacy by making use of the conquered 
 
MODERN BUSINESS ORGANIZATION 11 
 
 races for various purposes connected with tlieir economic 
 
 life. 
 
 4. It is the function of the enterpriser, or business 
 manager, to direct capital, labor and the natural resources, 
 into their proper channels; to unite the three in proper 
 proportions to secure the greatest economic results; and un- 
 der certain methods of business organization, to assume the 
 risks connected with the conduct of business establishments 
 and to take the profits that arise as the result of such opera- 
 tions. 
 
 Business Units. 
 
 A combination of land, labor and capital, organized into 
 a working union, under the direction of a man or a group 
 of men, for the purpose of creating utilities, that is, to add 
 to the store of useful things, constitutes a business unit. 
 Business units differ in size, in complexity, m permanence, 
 and in the character of the work which they undertake. For 
 example, the shoemaker's shop is a business unit; it occu- 
 pies and uses a portion of the land, one or more laborers 
 are more or less regularly at work, and it uses capital in the 
 form of a building, tools, lasts, leather and shoemaker's 
 findings. Finally, one or more men, usually one, directs 
 the activities of the establishment for the purpose of mak- 
 ing and repairing boots and shoes. The grocery store is a 
 second example of a business unit of a somewhat more 
 elaborate tyve. The grocery store uses land, capital and 
 labor and requires management. The capital assumes a 
 somewhat different form from that found in the shoe shop, 
 but it is still capital. It is made up of a stock of groceries, 
 continually changing in kind and quantity, a store building, 
 fixtures, horses and delivery wagons. A grocery store usu- 
 ally requires the work of more laborers than a shoe shop 
 and labor of a different kind. Some labor, however, is 
 indispensable in either case. Furthermore, the gi'ocery 
 store, like the shoe shop, needs intelligent management. 
 
12 MAURICE H. ROBINSON 
 
 This management may be in the hands of one man, or under 
 two or more men Avorking together as one. Without such 
 management the stock of goods will grow stale, the capital 
 will be destroyed, and the labor will be misdirected. 
 
 The United States Steel Corporation is a third example 
 of a business unit of an exceedingly complex character. 
 Unlike the shoe shop and the grocery store, the Steel Cor- 
 poration is itself made up of subordinate or constituent 
 parts which, from their character, we may call operating 
 units. These operating units are united into a single busi- 
 ness unit by means of the holding-corporation method of 
 uniting economic interests that will be more fully described 
 in a later section. These operating units are each composed 
 of land, capital and labor. In this respect they are identi- 
 cal with the small business units already described. In 
 one important characteristic they differ, however, and that 
 is in respect to the management. The operating units of 
 which the Steel Corporation is composed are each controlled 
 and directed from the central office. That is, they are not 
 self-directing, but subject to the orders of general admin- 
 istrative officers of the Steel Corporation. Unity of man- 
 agement is, then, a peculiar characteristic of a business 
 unit. 
 
 Thus a business unit may be identical with an operating 
 unit, or composed of several such organizations. More- 
 over, when business units are made up of several formerly 
 independent business units, the union may be either partial 
 or complete, temporary or permanent. When the control 
 is divided between the subordinate units and the central or- 
 ganization, the union is a partial one ; the rights of the cen- 
 tral management are limited by the terms of the union, and 
 in all other respects the formerly independent business 
 unit is free to act for itself. This form of business organi- 
 zation may be likened to the federal union of governments 
 similar to that of the United States and the several states 
 of which the central government is composed. The several 
 
MODERN BUSINESS ORGANIZATION 13 
 
 subordinate operating business units are in tbe ])r()eess of 
 becoming completely merged with the central organization, 
 and if the process is carried to its logical conclusion, tlu^ 
 organization, from a business point of view, will in \\\o. 
 course of time be completely unified. Where the control is 
 entirely in the hands of a single management, the union is a 
 complete one. In this case the operating units have no 
 rights of their owti, but are strictly subject to orders from 
 the central administrative offices. Such a business organi- 
 zation may be compared with a completely unified central 
 government where the legal political organizations, such as 
 the cities, counties and townships, have no rights of their 
 o^^^3, but are entirely subject to the control of the state 
 legislature and the state administration. 
 
 Where a business unit is made up of operating units, 
 the union may be formed for a period of years, or may be a 
 pei-manent organization. In cases where the union is not 
 complete it is quite usual for a temporary union to be 
 formed. Such unions are illustrated by the combinations 
 which were very common in the United States during the 
 seventies and early eighties, and have been for the last 
 quarter of a centuiy a characteristic feature of German in- 
 dustrial organization. Where the imion is at all com- 
 plete, the organization is more likely to become a per- 
 manent one. The advantages of complete and perma- 
 nent organizations are so great that the tendency is 
 strongly towards this type of business organization. 
 A good illustration of this type is the American 
 Sugar Kefining Company as organized in 1894 after the 
 dissolution of the first sugar trust. It is better illustrated 
 by the International Harvester Company, which is made u]i 
 of a number of foiTnerly independent factories, all of which 
 are now completely unified from the standpoint of business 
 organization and business management into one great com- 
 pany. 
 
14 MAURICE H. ROBINSON 
 
 Methods of Conducting Business. 
 
 Considered from the standpoint of economic reward, 
 there are two imj)ortant methods of conducting business 
 enterprises. The first class comprises those groups in which 
 all the individuals interested in the business enterprise 
 share in the income ; the second class consists of those groups 
 where a selected few control the operations: they pay a 
 stipulated amount for the use of the land, capital and labor 
 employed, they assume all or the major portion of the risk 
 of failure, and receive correspondingly all or a major por- 
 tion of the profits arising from the operations. 
 
 The most comprehensive type of organization of the 
 first class is the communistic society. Under this form of 
 organization there is only a single business unit for the 
 whole economic society. In its ideal form this society is 
 identical in its organization and scope of activity with the 
 political organization known as a state. Under present con- 
 ditions, however, the communistic societies existing today 
 are small organizations forming one of the many business 
 units of which the state is composed. Communism differs 
 from other types of economic society in two important re- 
 spects : First, not only the land and the capital belong to the 
 entire community, but all goods ready for consumption are 
 held in the name of the community and distributed to the 
 various members on a substantially equal basis, by the 
 central management. The work of production, moreover, 
 is directly under the control of the same all-powerful board 
 of directors, subject only to the duly enacted constitution 
 and the by-laws of the society. The directors are elected by 
 popular vote at stated intervals, and possess during their 
 term of office the entire political power as well as the right 
 of business management. To this board belongs the task of 
 assigning to each member of the organization his work, and 
 of supervising its execution. The communistic society, 
 therefore, must be completely and harmoniously organized, 
 
MODERN BUSINESS ORGANIZATION 15 
 
 as well as skilfully managed, or the individual members will 
 fail to perform the various tasks efdciently and the society 
 will fail for w^ant of the necessaries of life. Owing partly 
 to the natural seltishness of mankind, and partly to the 
 difficulty of organizing and managing societies of so com- 
 plex a character, few connnunistic organizations have, 
 achieved success. Unless held together by some dominant 
 religious motive, they usually have experienced a stormy 
 existence and a short life. 
 
 A more promising form of social organization is known 
 as socialism or the socialistic society. Socialists differ from 
 conummists in several important respects. AMiile the com- 
 munists make all property common, the socialists not only 
 permit but encourage individual ownership of goods ready 
 for consumption. To use the words of Professor Ely (Out- 
 lines of Economics, page 515) : "Socialists seek the estab- 
 lishment of industrial democracy through the instrumen- 
 tality of the state. Our political organization is to become 
 also an economic industrial organization. Socialism con- 
 templates an expansion of the business functions of the 
 Government until the more important businesses are ab- 
 sorbed. Private property in profit-producing capital and 
 rent-producing land is to be abolished. Socialists make no 
 war upon capital ; what they object to is the private capital- 
 ist. They desire to socialize capital and to abolish capital- 
 ists as a distinct class. Their ideal, then, is not, as is sup- 
 posed by the uninformed, an equal division of existing 
 wealth, but a change in the fundamental conditions govern- 
 ing the acquisition of incomes." Socialistic organization, 
 then, expands the economic functions of the state so far as 
 seems necessary in order to abolish private property in land 
 and the tools of production. In all other cases the individ- 
 ual, or groups of individuals, voluntarily engage in the 
 usual economic activities. The socialistic organization, 
 then, is coincident with that of the state so far as its func- 
 tions extend. Like the communistic organization, it must 
 
16 MAURICE H. ROBINSON 
 
 be well organized and well managed or disaster and failure 
 inevitably follow. 
 
 Side by side with the socialistic organization and mthin 
 the political organization, there exist voluntary organiza- 
 tions of individuals for the purpose of undertaking eco- 
 nomic functions not under the control of the socialistic 
 state. Such voluntary organizations work for themselves 
 exactly as most men work under present conditions. There 
 is thus competition existing between the socialistic state 
 carrying on the work of production, and the voluntary or- 
 ganizations of individuals undertaking all other economic 
 activities. Unless the socialistic state is able to work with as 
 great efficiency as those engaged in private enterprise, so- 
 cialism proves a failure and is likely to be abandoned even 
 by its own adherents. Like communism, the economic suc- 
 cess of the socialistic state depends more largely upon or- 
 ganization and administration and less upon the individual 
 ability than the present methods of conducting business 
 affairs. 
 
 A less pronounced tjipe of social organization, and one 
 that is under present conditions considered even more prac- 
 tical, is the co-operative societ}^ Such organizations depend 
 upon the voluntary co-operation of the ]3arties, and there- 
 fore must be successful from the economic point of view in 
 order to be permanent. Like the communistic and socialis- 
 tic societies, co-operative organizations are managed by an 
 elected board. They maintain, for purposes of operation, 
 an administrative organization similar to that which exists 
 in the ordinary business enterprise. The important char- 
 acteristic of this form, and one that distinguishes it from 
 the usual type of business organization, is this : The serv- 
 ices of land, capital and the managers are paid for out of the 
 gross income of the organization, and the laborers share the 
 remaining profit in accordance with the plan arranged by 
 the constitution of the society. The co-operative enterprise 
 succeeds, therefore, provided the board of directors are 
 
MODERN BUSINESS ORGANIZATION 17 
 
 siiffi('i<'ntly far-sio-htcd to oin])loy able adiiiinisti-ators; and 
 furthermore provided tlie laborers, being in ultimate con- 
 trol, submit to discipline and work as efficiently mider their 
 owu organization as they do under a capitalistic organiza- 
 tion at the regidar wage scale. Co-operative societies are 
 formed to engage in production and to assist their members 
 in purchasing goods and services for their individual con- 
 sumption. The first class has had very little success, al- 
 though there are a few notable exceptions, for example, 
 the Coopers' Co-Operative Societies of ^Minneapolis. As a 
 rule, co-operation in production has been successful only 
 when the work is simple in character and where the goods 
 manufactured are easily sold. Co-operation as an aid in 
 purchasing goods and services has been much more success- 
 ful from the economic standpoint, and therefore such organ- 
 izations exist in considerable numbers in many different 
 countries. This results partly from the fact that the profits 
 can be more fairly distributed, partly because the risks are 
 less, and partly because the problems of management are 
 less difficult to solve. Co-operation of this kind has been 
 peculiarly successful in providing life insurance. 
 
 The several classes of business enterprise described 
 above stand in marked contrast with the second type of 
 business organizations. Under the influence of a competi- 
 tion, a managerial class, technically known as entrepre- 
 neui's, has been developed, whose special function it is to 
 organize and direct business imits and to take the profits 
 arising from their operation. Under normal conditions, 
 the managers own a part of the land and capital, and employ 
 or contract for the use of such additional land and capital 
 as they find it profitable to employ. They further contract 
 for labor of the proper kind and quantity to operate the 
 plant. They sell the entire product on the open market, pay 
 all the expenses and assume the risks in connection with 
 production due either to misdirected effort or to destructive 
 forces of nature. On the other hand, if the character and 
 
 B— II— 3 
 
18 MAURICE H. ROBINSON 
 
 location of the business is well chosen, and if the business 
 is well organized and ably managed, the profits arising from 
 such favorable conditions are the reward of successful man- 
 agement and belong to the manager. 
 
 Under somewhat extreme conditions of individualism 
 the manager is a single person, directing the establishment 
 himself, assuming all the risks and receiving all the profits. 
 This was the usual condition of industrial organization in 
 the early stages of industrial development, when operations 
 were simple and the capital required was small. With the 
 invention of machinery and the establishment of the factory 
 system on a large scale, the character of manufacturing de- 
 manded more capital and more varied talents on the part 
 of the manager. Hence the development of associations of 
 individuals for the purpose of conducting and controlling 
 business enterprises and the division of labor within the 
 managerial group. For example, in a partnership manu- 
 facturing business, one of the partners may act as treasurer, 
 supervising the accounts, while the other partner has charge 
 of the factory and the men there employed. Under such 
 circumstances it is not difficult for the treasurer to cheat 
 his colleague out of a part of his rightful earnings. In 
 larger organizations the division of labor and of function 
 is found more marked. In fact only a few of the men who 
 really undertake the risk of the enterprise have ordinarily 
 any direct control over the financial or manufacturing oper- 
 ations of the company. They elect a board of directors who 
 take direct charge of the management, rendering an account 
 of their work at the annual meeting. It is of course diffi- 
 cult, not to say impossible, for the average stockholder to 
 understand the accounts or to determine from them whether 
 or not the business has been honestly and efficiently man- 
 aged. Furthermore, the directors in most cases employ men 
 as superintendents and managers, as treasurers and ac- 
 countants, who may not be members of the company at all, 
 and thus the direct economic relationship originally existing 
 
MODERN BUSINESS ORGANIZATION 19 
 
 between the manager and his reward is partially and some- 
 times completely destroyed. Since organizations of this 
 character are economically desirable to furnish capital to 
 undertake the operation of the more important enterprises, 
 all citizens are more or less directly interested in their hon- 
 est and efficient administration. Therefore the state, rep- 
 resenting the common good, has in recent years, by acts of 
 the legislature and by judicial decisions, regulated to a con- 
 siderable extent the internal affairs of all foi-ms of volun- 
 tary business associations w^hich operate on a large scale. 
 
 Industrial Groups. 
 
 Business organizations need to be adapted to the nature 
 of the work which they are to undertake. Work which is 
 simple in its nature, requiring small plants and few men, 
 is best conducted by a simple organization. Work of a 
 more complex character demanding large plants and a large 
 labor force needs complex organizations. Since the char- 
 acter of the plant is largely conditioned by the character of 
 the work which is undertaken, it is desirable to classify 
 the various industries into groups, each of which is devoted 
 to ojDerations similar in character and requiring similar 
 organizations. From this point of view we may classify 
 industries into the following groups: 
 
 1. The Extractive Industries. The extractive indus- 
 tries include fanning, fishing, lumbering and mining. In 
 the first three of the industries the business units are small 
 and are generally best acbninistered by the individual pro- 
 prietor or a partnership. In the case of mining, however, 
 the condition is somewhat different. Mining as carried on 
 at the present time requires a large investment of capital, 
 and elaborate machinery. Consequently the mining in- 
 dustry generally demands a business organization of a some- 
 what elaborate order, and in this respect differs widely 
 from the other extractive industries. 
 
20 MAURICE H. ROBINSON 
 
 2. Manufacturing. Manufacturing, as the word signi- 
 fies, means "made by hand," and in earlier stages practi- 
 cally all manufactured goods were thus made. Manufactur- 
 ing was then in what is known as the handicraft stage ; con- 
 sequently we find that it was operated generally by small 
 and simple organizations. Later it became a machine in- 
 dustry demanding a large investment of capital in tools 
 and machinery, and the organization has accordingly been 
 adapted to the new conditions. Again, goods are made 
 either to order or for t^e general market. For example, 
 men's clothing is made either in the small shop of the cus- 
 tom tailor, permitting of a simple business organization, or 
 it is made in the large factory, catering to the general 
 market, in which case the organization becomes sufficiently 
 complex to take care of the varied activities of this method 
 of manufacture. In the third place, manufacturing plants 
 may undertake only one stage in the process, or all of the 
 stages. For example, a business establishment may manu- 
 facture Bessemer steel billets only, or it may mine the ore, 
 convert the ore into pig iron, and then into steel billets, then 
 into beams and finally into bridges. It may even go so far 
 as to erect the bridges ready for traffic. In such cases the 
 organization should be correspondingly complex in order to 
 permit of efficient direction and management. 
 
 3. Commerce. The specific work of commerce consists 
 in transferring titles to various kinds of private property. 
 Usually, however, storage of goods connected with the trade 
 is conducted in connection with the direct work of com- 
 merce. The work of commerce is thus to take the goods 
 from those who have a surplus and transfer them to those 
 who have a deficiency. Commerce may be either local, na- 
 tional or international in scope. Commerce of a local na- 
 ture is ordinarily simple in character and needs only simple 
 business organization. National and international com- 
 merce are more complex and require more complex organi- 
 zation. 
 
MODERN BUSINESS ORGANIZATION 21 
 
 4. Transportation. Commerce transfers titles; trans- 
 portation distributes the goods. Transportation is con- 
 ducted by a variety of agencies and instrumentalities. In its 
 simplest form it is conducted by pack animals, by wagons 
 and drays and by boats and sailing vessels ; in its more com- 
 plex form, by steam cars, steam boats, by electric traction, 
 by pneumatic tubes, and by pipe lines for the transportation 
 of oil and other fluid products. In its modern development, 
 transportation, as illustrated by the modern railway, is the 
 most complex of all business enterprises and consequently 
 demands the most compi-eheusive and highly developed 
 business organization. 
 
 Political Conditions and Business Organization. 
 
 The character of the government directly affects busi- 
 ness organization and management in several important 
 particulars. In the first place, some governments undertake 
 many kinds of business enterprises, and all governments 
 enter into business to a limited extent. For example, prac- 
 tically all governments collect, transport and deliver mail. 
 Many governments operate telegraph and telephone sys- 
 tems, street cars, water works and gas plants, and furnish 
 electricity for lighting purposes. A few govermnents fur- 
 nish markets and undertake the business of carrying 
 freight, passengers and express. In some cases govern- 
 ments prohibit the regular business organizations from 
 entering into the business industries which they operate. 
 In other cases governments compete with private organi- 
 zations doing the same kind of business. 
 
 In the second place, all governments authorize particu- 
 lar forms of organization and make specific regulations in 
 regard to their operation, and protect such organizations 
 as they authorize so far as they conform to the law. Thus 
 the partnershij) and the corporation is universally author- 
 ized by every modem government. Furtheraiore, mer- 
 chants' and manufacturers' associations, stock exchanges. 
 
22 MAURICE H. ROBINSON 
 
 labor unions, and other organizations formed for the pur- 
 pose of facilitating business activity, are permitted and 
 protected by law. In cases where particular forms of 
 business organizations are definitely authorized, the au- 
 thority thus conferred is always strictly limited by the 
 terms of the act. In other cases, where business organiza- 
 tions are voluntarily formed but not definitely authorized 
 by a particular legislative act, the authority of such organi- 
 zations, their internal relations, and the scope of their 
 activities are determined in each case by the courts as the 
 case seems to demand. 
 
 In the third place, practically all modern governments 
 undertake, through legislation, the courts and the admin- 
 istration, to protect property rights of all business organi- 
 zations that are legitimately formed. In this country, the 
 Federal Government and most of the individual states 
 protect such property rights by clauses in the fundamental 
 constitutions as well as in the statute law. Moreover, cer- 
 tain organizations are permitted in the interests of the 
 public welfare, to take private property under the right of 
 eminent domain for their own use, paying the owners of 
 the property proper compensation, whenever in the judg- 
 ment of the courts such transfer of property rights is in 
 the interests of the public service. 
 
 In the fourth place, all governments protect the con- 
 tracts which are entered into by business organizations. 
 Whenever agreements between such organizations are, for 
 any reason, not enforced through some responsible gov- 
 ernment, they are almost invariably broken, whenever it 
 becomes for the individual interest of either party to do so. 
 Whenever the agreements entered into by business organi- 
 zations are deemed contrary to public policy, the parties to 
 such agreements are subjected to either civil or criminal 
 penalties, or to both. 
 
 In the fifth place, most governments regard the com- 
 petitive system as fundamental in the present economic 
 
MODERN BUSINESS ORGANIZATION 23 
 
 life, and therefore attempt in many important ways to 
 protect and perpetuate it. Any organizations, therefore, 
 that phiinly and deliherately attempt monopolies in an in- 
 dustry, are ordinarily subjected to punishment, and in 
 certain cases the governments take extreme measures and 
 order their dissolution. This policy results in preventing 
 the formation of certain kinds of organizations in some 
 cases, of breaking up larger organizations into smaller ones 
 in other cases, and in still others of entirely changing the 
 form of organization generally adopted for carrying on 
 business enterprises. An excellent example of this is found 
 in the attitude of the United States Government and the 
 German Government to that form of organization kno^^^l 
 as the combination in this country and the cartel in Ger- 
 many. In the United States, combinations have always 
 been held void and in most cases illegal. In Germany, on 
 the other hand, such organizations have been approved and 
 the agreements under which they are fomied are enforce- 
 able at law. Consequently our American industrial leaders 
 early abandoned the combination and adopted the trust 
 fonn, and later the corporate form, of organization in its 
 place, while the Germans have, under substantially similar 
 industrial conditions, continued to administer the common 
 relations of their large business enterprises through the 
 cartel method. 
 
 In the sixth place, in some cases governments go so far 
 as to regulate the character of the service which business 
 organizations fonned within their domains render to their 
 customers. In some cases this regulation is in the interest 
 of those who purchase the goods; in others, of those who 
 are engaged in the service. Examples of the first method 
 are found in the pure food law recently enacted by the 
 United States Congress, and in laws of a similar character 
 enacted in several of the states, to re.gulate the quality of 
 gas and water furnished by private organizations. Exam- 
 ples of the second method are found in the federal legisla- 
 
24 MAURICE H. ROBINSON 
 
 tion requiring all interstate railways to equip their trains 
 with safety couplers, and in the state laws requiring build- 
 ings to be erected in conformity to the building regula- 
 tions made for the purpose of preventing conflagrations. 
 In the seventh place, most modern governments regu- 
 late the price which business organizations may charge for 
 certain kinds of industrial service. The most important 
 industry in which this policy is generally followed is that 
 of transportation. It is also quite generally applied 
 throughout the domain known as the public service field. 
 Originally it was thought that competition between rival 
 railway systems would insure fair and stable railway rates. 
 As a result of experience, it has been found that railway 
 com]3etition results in fluctuating rates and discrimination 
 between places and individual organizations, and generally 
 in the final consolidation of the competing lines. To rem- 
 edy the evils growing out of such conditions, some govern- 
 ments have purchased and operate the entire railway sys- 
 tems within their domains; others have authorized some 
 public authority, usually a commission, to adjust the rates 
 for the purpose of securing fairly equitable conditions be- 
 tween competing railways and between the railways and 
 those who make use of their services. The character of the 
 policy of various governments with respect to business or- 
 ganizations thus plays an exceedingly important role at 
 the present time and one of growing importance as the 
 complexity of industrial conditions increases. 
 
 Social and Industrial Conditions Affecting Business. 
 
 Not less important than the political conditions are the 
 social customs and moral ideals of the business world. As 
 already noticed, in organized industry each individual re- 
 ceives his own economic reward as a result of the division 
 of a common fund. With simple organizations it is possi- 
 ble for the parties interested to take part directly in the 
 division of the spoils. In most cases, however, the share of 
 
MODERN BUSINESS ORGANIZATION 25 
 
 each x)articipaut is to a considerable extent dependent upon 
 the good faith of those chosen to make the distribution. 
 AVhile governments may punish those who act fraudu- 
 lently and may attempt in all possible ways to insure an 
 equitable allotment of the conmion store, still, generally, 
 the parties to a comprehensive business organization must 
 rely on the good faith and common honesty of those whom 
 they choose to manage the enterprise. This is the reason 
 why the corporation cannot flourish except in communities 
 where the standard of business morals is fairly high and 
 why profit-sharing co-operative organizations have usually 
 failed. It is true, of course, that the introduction of ac- 
 counting systems and the extension of the police activity 
 of the state may make possible business organizations of 
 considerable complexity, even where the morals are low. 
 Such conditions, however, add immensely to the cost of 
 conducting business and to the expenses of the Government. 
 Ordinarily, therefore, the simpler types of business organ- 
 izations persist until the moral tone of the business com- 
 munity is fairly high. 
 
 Again, the development of the higher types of business 
 organization is for many reasons extremely slow. The 
 corporation, for example, existed in its principal features 
 among the Romans, two thousand years ago, but yet it is 
 only within the last twenty-five years that this foi-m of 
 organization has become a dominant factor in modern busi- 
 ness enterprise, and that only in the more progressive coun- 
 tries. In this respect the city stands in marked contrast to 
 the country. This is because it is customary for the city 
 dweller to associate in various ways with his neighbors. 
 On the contrary, the countryman is, ])y force of circum- 
 stances, in the habit of working and living alone. lie 
 undertakes certain co-operative enterprises in connection 
 with his neighbors, to be sure, but in his ordinary business 
 relations he acts purely in his own capacity as an individ- 
 ual. For this reason it is difficult to fonn corporations 
 
26 MAURICE H. ROBINSON 
 
 for the pui3)ose of carrying on, for instance, creameries 
 among the dairy farmers, and on this account stockbro- 
 kers do not look among the farmers for their regular 
 customers, although as a matter of fact the farmers are 
 becoming an important class of investors. With their sur- 
 plus gains they buy land and make their investments where 
 they can personally overlook the property which they own 
 and directly superintend its management. Thus associat- 
 ed business enterprise has not become a habit or custom 
 with them. They are accustomed to associate for political 
 purposes, but not for business enterprise. 
 
 The development of the co-operative spirit necessary in 
 the modern business organization and management is the 
 outgrowth of experience and is founded upon mutual confi- 
 dence and reciprocal good faith. Since the earliest times, 
 men have been accustomed to co-operate for the purpose 
 of undertaking physical tasks beyond the strength of one 
 man. Thus, for example, in colonial days, and even with- 
 in the memory of the present generation, substantial frame 
 houses and barns were erected at a raising in which all the 
 active young men of the neighborhood joined. Another fa- 
 miliar method of co-operating is known as changing work, 
 characteristic of New England farm life in earlier days and 
 still common in every farming community. In such cases 
 the relation existing between the service rendered and the 
 compensation is easily calculated by the participants. With 
 the complete development of the principle of specialization 
 of work, and of the economic system kno\\Ti as money ex- 
 change, the character of co-operation has almost entirely 
 changed. Men co-operate at the present time chiefly in 
 furnishing capital to equip and operate factories, stores 
 and railways. Capitalists and laborers co-operate, each 
 class furnishing the necessarj^ element in the work of pro- 
 duction and each receiving his compensation out of the 
 conmion product. Under these circumstances, the relation 
 between the work done and its just reward, so obvious in 
 
MODERN BUSINESS ORGANIZATION 27 
 
 plij^sical co-operation, is always difiicult and sometimes im- 
 l)()ssiblc to ascertain. Consequently men hesitate to enter 
 into organizations of this character, preferring to work 
 alone and enjoy all the fruits of their labor even though 
 such fruits may be less abundant. As men become more 
 honest and less seltish, the co-operative spirit develops. As 
 men become more and more proficient in their grasp of 
 economic principles, they are able to understand the part 
 played by each factor in general production, and therefore 
 they are better able to agree on a division of the product 
 into individual shares. 
 
 But to understand the problem is not enough. Some ex- 
 act method of applying the principles must be used to se- 
 cure results. Such a method is furnished by modern ac- 
 countancy. Accounting thus has a double task to perform : 
 First, to secure responsibility and attention to duty; and 
 second, to determine the part played in joint production 
 by the several elements in business organization and con- 
 sequently the proper share of each in the common product. 
 Thus the co-operative spirit, so necessary in the com- 
 plex organizations of our modern business life, awaits the 
 develoi)ment of a higher standard of business morals and 
 a more perfect understanding of economic principles and 
 the application of such principles through the science and 
 art of accounting. 
 
 That the character of business organization is profound- 
 ly affected by industrial conditions does not need to be 
 proved. In the handicraft system the organization was 
 bound to be simple ; in the factory system the organization 
 becomes complex as the factory operations become com- 
 plex and intricate. Thus the invention of the spinning 
 jenny, of the power loom, of the steam engine and the lo- 
 comotive, of the telegraph and telephone, of Bessemer steel 
 and of re-inforced concrete, have been, during the past cen- 
 tury, dominant forces causing business organization to 
 become more and more complex and more and more exten- 
 
28 MAURICE H. ROBINSON 
 
 sive. Moreover, the enlargement of modern states through 
 the absorption of small political units, the extension of free 
 trade areas, the development of cheap transportation and 
 of the world market, have constantly been calling for a 
 higher organization of the industrial activities. Further- 
 more, the amount of capital ready for investment and the 
 freedom with which it flows into the hands of business 
 managers, plays an important part in shaping business or- 
 ganization. The industrial and financial conditions for the 
 past century have been demanding changes in business or- 
 ganization, all looking toward greater complexity and 
 greater size. On the other hand, the unfavorable political 
 conditions, the low standard of business morals, lack of a 
 knowledge of economic principles, unscientific accounting, 
 and a scarcity of men of the proper caliber to undertake 
 the task of organization and management for large and 
 complex business undertakings— all these factors have 
 prevented the normal development of business organiza- 
 tion corresponding in character with the technical develop- 
 ment of the industrial world. Rapid progress has been 
 made in all of these lines in the past century, and it may 
 be confidently expected that such barriers to the proper de- 
 velopment of business organization will be of less impor- 
 tance in the future. 
 
 II. THE ORGANIZATION OF BUSINESS ENTER- 
 PRISES. 
 
 Classes of Organizations. 
 
 As already stated, the function of the enterpriser, or 
 business manager, is to organize the factors of production 
 into a working union, direct their activities, assume the 
 risk of failure, and receive the rewards of business suc- 
 cess. Under ordinary conditions, in industrial soci'ities as 
 at present carried on, there are three principal types of 
 business organizations, each having peculiarities of its own, 
 
MODERN BUSINESS ORGANIZATION 29 
 
 each being litted for certain kinds of business oi)erati()ns, 
 and each having certain limitations which prevent its gen- 
 eral adoption. These three kinds of business oi-ganizations 
 are the individual proprietorship, the partnership, and the 
 corporation. 
 
 The Individual Proprietorship. 
 
 The individual proprietorship has several marked ad- 
 vantages which make it a prominent type of business or- 
 ganization. In the first place, the individual proprietor 
 can ordinarily undertake any kind of business enterprise 
 except those which are assumed by the government exclu- 
 sively, or are forbidden on grounds of public policy, or 
 require special licenses. Thus an individual business enter- 
 priser cannot, in the United States, undertake the transpor- 
 tation of the mail, or engage in coining money, or at the 
 present time engage in the lottery business. Nor can an 
 individual ordinarily undertake the basiness of selling alco- 
 holic beverages without a license from some responsible 
 government. But outside of those business activities which 
 are assumed by the Government, forbidden entirely, or per- 
 mitted by license only, the individual proprietor is free to 
 enter into any business enterprise, conduct it as long as he 
 pleases, and retire from it whenever he has completed all 
 the contracts which he has entered into. The ability of the 
 individual proprietor to enter into business undertakings 
 without any formality, and retire in the same way, is an 
 important factor in promoting business enterprise and in 
 keeping the several lines of business activity evenly de- 
 veloi)ed. 
 
 In the second place, the individual proprietor, having 
 no one else to consult, can act in all emergencies with great- 
 er promptness than the more complex forms of organiza- 
 tion. He may thus take advantage of business opportuni- 
 ties that are impossible in the case of partnerships or cor- 
 porations. 'For the same reason he may also avoid certain 
 
30 MAURICE H. ROBINSON 
 
 dangers that ordinarily surround, and sometimes destroy, 
 business enterprises. Of course tlie ability to act promptly 
 is not an unmixed business blessing. It is often the 
 case that hasty action is the direct cause of business 
 failure. Where deliberation and the combined judg- 
 ment of several men are desirable, the individual 
 proprietorship has marked disadvantages. The individ- 
 ual proprietor, then, having the power to act on his 
 own responsibility, must needs be a man of sound 
 business judgment and discretion in order to main- 
 tain his business existence side by side with organiza- 
 tions which are able to use the business ability of several 
 men in determining questions of business policy. As busi- 
 ness conditions become more stable and the law of busi- 
 ness success becomes better known, the advantages of thy 
 individual proprietor grow less and less. 
 
 In the third place, the individual proprietor can keep 
 his own affairs to himself and, while the element of secrecy 
 is of less and less importance as business management be- 
 comes more of a science and less of an art, still the more 
 competitors know of one's business plans and processes, the 
 less the chances of ultimate success. This is the inevitable 
 result of two conditions, both of which seem to be permanent 
 factors in our present-day economic system. They are (1) 
 competition and (2) ignorance. 
 
 Competition is the economic struggle of similar business 
 units for supremacy; hence strategy, maneuvering, and 
 sometimes deceit, play an important part in business suc- 
 cess. Consequently details of plans must be kept from com- 
 petitors, and this is always difficult and sometimes impos- 
 sible where many men are interested in the business man- 
 agement. Second, it is only by keeping one's business en- 
 emies in ignorance of one's plans, methods and processes, 
 that one is able to keep whatever advantage comes from ex- 
 clusive knowledge. As secret processes become known to 
 the trade, and as business success becomes more and more 
 
MODERN BUSINESS ORGANIZATION 31 
 
 dependent upon efficiency in production, the advantages 
 ui" the individual proprietor in this respect become of less 
 importance. 
 
 In the fourth place, since every business enterprise has 
 its own i^cculiar risks and those who undertake the organi- 
 zation and management reap the profits from their exclusive 
 operation, it follows that the same parties ought to suffer 
 the natural penalties that result from unsuccessful manage- 
 ment. In the individual proprietorship this is ordinarily 
 the case. Those who manage business enterprises well, jDros- 
 per ; those who do not, soon fail and take their proper places 
 as superintendents and laborers. The law of survival of 
 the fittest thus is applied with almost relentless certainty 
 to business enterprises operated under the control of the 
 individual proprietor, and rapid progress in the science and 
 art of business management is a necessary result. 
 
 There are, however, several particulars in w^hich the in- 
 dividual proprietor fails to provide successful business or- 
 ganization for particular kinds of businesses. The more 
 important of these disadvantages may be enumerated and 
 placed in contrast with the strong points of this type of 
 organization. In the first place, owing to the demand for 
 large organizations in certain industrial groups, the capi- 
 tal at the connnand of any one individual is often insuf- 
 ficient for the construction and operation of a plant of the 
 greatest economy ; hence individuals combine their capital. 
 In the second place, large enterprises often require busi- 
 ness judgment, skill and ability beyond the capacity of 
 any one man to furnish; hence several men enter into a 
 combination to conduct jointly a business entei*prise in or- 
 der that they may secure the benefits of their co-operative 
 wisdom. In the third place, in accordance with the teach- 
 ings of the modern theory of risk, business men hesitate to 
 put all their eggs in one basket and undertake the risks that 
 follow from such a policy. Moreover, the individual can- 
 not avoid the risks by organizing and managing many small 
 
32 MAURICE H. ROBINSON 
 
 enterprises, for in the first place any one of such enter- 
 prises is liable for the losses suffered by any other of the 
 business enterprises. In the second place, this scattering 
 of the capital within the control of any one individual pre- 
 vents him from securing the economies of a large scale of 
 production. 
 
 For these reasons the individual proprietorship is adapt- 
 ed to the following classes of industrial enterprises only: 
 Those where the capital required for efficient production is 
 small; those where the risks of conducting the enterprise 
 are relatively slight ; those where the operations are simple 
 in character and well understood by the average business 
 man. Consequently organizations in which the skill and 
 capital of a number of individuals are united have largeh 
 superseded the individual proprietor in all the industries 
 which require large-scale production to secure the great- 
 est efficiency. 
 
 The Partnership. 
 
 The simplest form of organization by which the skill 
 and capital of two or more men may be combined for the 
 purpose of undertaking the management of business enter- 
 prises is the partnership. The partnership may be defined 
 as ''the result of a contract between two or more competent 
 parties to combine their mone}^, property, skill or labor for 
 the prosecution of some lawful business for profit." A 
 partnership, then, may be formed by the mutual agreement 
 of any gi'oup of men for any lawful object. Each of the 
 partners ordinarily has equal rights with all the others in 
 the management of the business. By agreement, however, 
 the rights of special partners may be limited, as in the case 
 of a dormant or special partner. The partnership, as a re- 
 sult of its natural characteristics, has the following essen- 
 tial features: (1) Each partner is agent for the others for 
 the purpose of conducting the business for which the part- 
 nership was formed; consequently any contract properly 
 
MODERN BUSINESS ORGANIZATION 33 
 
 connected with the business and entered into by any one of 
 the firm, is binding on the partnership. The management 
 is thus in the control of the several members of the part- 
 nership, acting both jointly and severally. Since each of 
 the members has equal rights with all the others, it is im- 
 possible to conduct a partnership business through the agen- 
 cy of a selected board of directors. 
 
 (2) The partnership is terminated by the death or re- 
 tirement of any one of the partners, and hence is always an 
 organization of limited duration. It is a personal relation- 
 ship, and hence a partner cannot sell his interest to a third 
 jDarty except with the consent of all the other partners, in 
 which case a new partnership is formed, although it may 
 retain the old name. 
 
 (3) The partnership is not recognized in legal theory 
 as a business unit; hence in case of business troubles, 
 suits are brought against one or more of the individual 
 members of the firm, and not against the firai itself. ^Eore- 
 over, all the personal property of any one of the members 
 of a partnership may be attached and, on judgment by a 
 court of competent jurisdiction, sold to pay the debts of the 
 partnership. Further, in case of insolvency, each partner 
 is personally liable for all the partnership debts. 
 
 Partnerships are classified with respect to the scope of 
 their business operations into general and special. A gen- 
 eral partnership is one organized for the operation of some 
 general line of business, while a special partnership is one 
 formed to undertake some definite task or some particular 
 line of business. ^lost connnercial and professional part- 
 nerships are of the former type, w^hile partnerships fomied 
 to purchase and subdivide a piece of real estate, to finance 
 and sell patentrights, or to promote and undei'write a cor- 
 poration, are examples of the latter. 
 
 Partnerships are again classified with respect to the lia- 
 bility of the partners into ordinary and limited. In the 
 former, all the partners are subject to the ordinary condi- 
 
 B — n— 3 
 
34 MAURICE H. ROBINSON 
 
 tioDS as specified above. In the latter type, wliicli may be 
 formed only under the direct authority of statute law, some 
 of the partners are silent and inactive, and their liability 
 is limited by the amount of their investments. Such part- 
 ners take no part in the management of the business. 
 
 In addition to the several forms described above, cer- 
 tain forms of business organization have been created by 
 statute, or recognized by the courts, which partake of the 
 character of partnerships on the one hand and of the cor- 
 poration on the other. The more important of these are 
 mining partnerships, and the ordinary joint stock company. 
 Both of these organizations operate under the principle 
 of unlimited liability, while each member may transfer his 
 interests and the members acting together may select 
 a manager, or board of managers, to conduct the business 
 affairs for the firm. In the case of mining partnerships 
 such authority is strictly limited to the necessary business 
 of the partnership. 
 
 The general ]3artnership seems to have developed from 
 the special partnership in relatively recent times. In the 
 early stages of the world's industrial organization the in- 
 dividual proprietor was the characteristic if not the ex- 
 clusive agency through which business enterprises were 
 conducted. During the early Middle Ages commerce by sea 
 was in a rapid stage of development and many varieties of 
 the special partnership were de\dsed and extensively used 
 for the purpose of sharing the risks of commercial under- 
 takings in foreign lands and on the high seas. With the 
 advent of the modern economic system, late in the sixteenth 
 century, the partnership relation was extensively adopted 
 for the conduct of commercial and manufacturing orga- 
 nizations at home, and, since such organizations were ex- 
 pected to be relatively permanent, the general partner- 
 ship became the dominant type and the special partnership 
 was reserved for more temporary undertakings. 
 
MODERN BUSINESS ORGANIZATION 35 
 
 The Articles of Copartnership. 
 
 The partnership relations are determined at the outset 
 and regulated during tlie life of the organization b}' an 
 agreement between the partners. Wliile partnerships may 
 be formed by oral agreement, they are ordinarily stated 
 in writing, and in such ease the statement containing the 
 contract is called the articles of copartnership. After the 
 articles of copartnership are once drawn u]), they can 
 be changed only by the unanimous consent of all the mem- 
 bers. Hence they are of the utmost imi^ortance, and should 
 be formulated with the greatest care. Tlie articles of co- 
 partnership differ with the character of the business un- 
 dertaking and the extent of the work which is undertaken 
 by the copartnership. In all cases, however, they should 
 cover the following subjects: The partners to the con- 
 tract; the firm name; the purpose for which the copart- 
 nership is formed; the investment of the parties and the 
 division of profits and losses; the character of the account- 
 ing system; the conduct of the business; the method of 
 management; the rights of the partners; the dissolution 
 of the partnership. 
 
 The first clause in the articles of copartnership should . 
 give the names and business addresses of the several mem- 
 bers. Since a partnership is a contract, only those compe- 
 tent to enter into such agreements can form a partner- 
 ship. The list includes natural persons possessing the nec- 
 essary qualifications, other partnerships, and, in cases 
 where the charter specifically provides for such unions 
 and the laws pennit, the corporation. In connection with 
 the names of the parties, the style of the firm name and 
 the place of business should be given. The fii-m name may 
 be either that of the pai'ties to the agreement, as A & B, 
 one or more of the parties and some phrase including the 
 others, as A, B & Co., or a company title, as The Sunlight 
 Company. 
 
36 MAURICE H. ROBINSON 
 
 The second section should state the purposes for which 
 the partnership is formed, and, since a partner's rights 
 and duties extend only so far as the work of the partner- 
 ship necessarily requires for its successful operation, this 
 clause should state especially the extent of the business 
 and the limits to which the business operations of the firm 
 extend. Otherwise constant internal trouble and often liti- 
 gation follow in order to determine the field within which 
 the acts of any one of the partners is binding upon the oth- 
 ers. For example, if a partnership is fomied to deal in 
 particular products, the names of such products should be 
 given in detail. Thus teas and coffees should be specified, 
 rather than groceries, where it is the purpose of the agree- 
 ment to limit the business to these two articles. 
 
 In stating the investments of the partners, the exact 
 kinds and quantities of capital contributed by each should 
 be given in detail. Where the investment is in the form 
 of money, the case is simple; where however, as in many 
 cases, the investment is a particular piece of property, or 
 particular stocks of goods, or a firm name, good-will, trade 
 marks, etc., the case is more complex. Especial care should 
 be taken in specifying the kinds of property invested. 
 Moreover, since the partner has no claim to interest on 
 his investment, unless by express agreement, the value 
 of the property upon which he is to receive interest and 
 the rate at which interest is to be reckoned, should be stat- 
 ed in the original agreement. Furthermore, since the 
 parties usually give all or a portion of their time to the 
 firm's business, the salary which each is to receive should 
 also be included in the formal agreement. This is obvious- 
 ly desirable since sometimes partners who contribute the 
 larger share of capital investment, and therefore are en- 
 titled to a larger share of the income in the form of inter- 
 est, may be less valuable members from the salary stand- 
 point. It is clear, of course, that any partner who draws 
 a larger salary from the firna than he is commercially 
 
MODERN BUSINESS ORGANIZATION 37 
 
 worth, is to that extent receiving a part of his partner's 
 profits. 
 
 In order to determine the profits and losses it is nec- 
 essaiy to employ a proper accoimting system. It is tliere- 
 fore necessary to specify that proper books of accounts 
 should be kept and that scientific methods should be used 
 in the interpretation of the books for the purpose of de- 
 tenniniug the respective share in the profits to which each 
 partner is entitled. In general there are two methods of 
 determining the relative profits: First, from an audit made 
 by the members of the firm or by an accountant directly 
 in their employ; and second, by an audit made by an in- 
 dependent professional auditor. It is of course unneces- 
 sary to provide in detail as to how the accounts should 
 be kept. It is sufficient to require that the proper books 
 be provided and that they be periodically balanced and 
 audited. It is also desirable to provide that any member 
 may have an accounting made whenever evidence of fraud 
 or mismanagement appears, without appeal to any court. 
 In all cases where a partnership conducts a business of 
 some importance, an annual audit of the books by an in- 
 dependent professional auditor of recognized standing and 
 ability, should be provided for in the articles of copart- 
 nership. Such audits are desirable not only because they 
 are likely to prevent fraud, but because they are one of 
 the important aids to good business management. 
 
 Owing to the fact that the acts of each partner, when 
 connected with a business partnership, bind the firm, and 
 that generally all the members take part in the active uiau- 
 agement, it is always desirable to state the extent to whicli 
 this general principle shall apply in any particular part- 
 nership. For example, it is possible to provide in the ar- 
 ticles of copartnership that no one of the members shall 
 have power to enter into a contract involving the firm 
 above a certain sum, without the agreement of all the part- 
 ners, and their individual signatures. It is also possible 
 
38 MAURICE H. ROBINSON 
 
 to provide that in the employment, direction and manage- 
 ment of employes, especially of heads of departments, su- 
 perintendents, etc., the consent of all members shall be 
 obtained before contracts are entered into. It is also de- 
 sirable in certain cases to provide that one of the mem- 
 bers shall act as manager. This may be done by an agree- 
 ment of the members inserted in the articles of copart- 
 nership. On the other hand, it may be desirable to pro- 
 vide that all important matters involving new ventures 
 or new methods shall first be discussed by all the members 
 of the firm and adopted only after the consent of the ma- 
 jority has been obtained. 
 
 The respective rights and duties of the partners should 
 be explicitly stated in the articles of copartnership. The 
 time which each is to give to the business, the extent to 
 which they may be engaged in outside undertakings, the 
 right to an accounting, the right to purchase or sell land or 
 other proi^erty belonging to the firm, the right to make 
 contracts, the right to undertake individual obligations 
 which may interfere with the credit of the partnership — 
 all these are proper subjects for determination before a 
 partnership is organized, to be included within the foiinal 
 contract under which it is operated. 
 
 It is also desirable to specify in the articles of copart- 
 nership under what conditions a partner may withdraw, 
 what are his rights in case of dissolution, and his share 
 of the firm's good- will. The dissolution of any partner- 
 ship may of course be provided for in the contract. This, 
 however, is often left to the mutual consent of the parties. 
 In certain cases it may be forced upon them as a result 
 of unfortunate circumstances. Wherever dissolution is 
 not provided for in the original contract, and in most cases 
 even though such be the case, a special clause should be 
 inserted setting forth the terms under which any one mem- 
 ber may withdraw. Circumstances may arise which render 
 it exceedingly desirable for some one member to withdraw 
 
MODERN BUSINESS ORGANIZATION 39 
 
 from the fimi and cuo^age in otlicr business activities, or 
 to retire from business entirely. At the same time it may 
 be exceedingly desirable for the other members to con- 
 tinue the business. In such a case the. retiring member is, 
 without any previous arrangements, entirely at the mercy 
 of those who remain. And it is too often the case that the 
 retiring member fails to get his share of the property and 
 the property rights of the partnership. It is of course im- 
 possible to provide in advance for every contingency; it 
 is however possible in all cases to provide for the with- 
 drawal of any one member and for a proper division of 
 both the property and good-wdll of the firm in case it is 
 found desirable for any one to retire. 
 
 It is, of course, impossible to provide for all the con- 
 tingencies that may arise in the conduct of any business, 
 even those of the simplest character, no matter how per- 
 fectly the general princii^les of the partnership are stated 
 or how explicitly the details are dra^\Ti up. Much must 
 therefore depend upon the good faith of the parties to the 
 agreement. In early times the partnership originally 
 seems to have gro^^Tl out of the family relationship. A 
 father develops a business enterprise, and upon his son's 
 coming of age, gives him an interest in it. Later other 
 sons and sons-in-law are added until the organization be- 
 comes of considerable size. When the father dies, the tie 
 that binds the organization loses a part of its family char- 
 acteristics. Gradually favorite clerks and expert work- 
 men are taken into partnership, until the last trace of its 
 original character is lost. Even though it retains none 
 of the ties that bind the family together, there still needs 
 to be obseiwed between the members of the partnership 
 the same good faith that ordinarily exists within the fam- 
 ily circle. The partnership, therefore, above all other 
 forms of business organization, demands the highest stand- 
 ard of business honor. Tlie members of a partnership may 
 deceive those from whom they purchase materials, cheat 
 
40 MAURICE H. ROBINSON 
 
 their customers, and such business sins may be overlooked 
 if not forgiven. But lack of good faith between partners 
 is death to this form of business organization. 
 
 Again, owing to the right of each member of the part- 
 nership to take part in the business management, this form 
 of organization cannot, under the most favorable condi- 
 tions of business morals, be used for conducting the larger 
 business enterprises. Whenever many men become par- 
 ties to an organization, they must content themselves with 
 choosing leaders and surrender their rights to partake in 
 the active management to a select few. While the part- 
 nership may designate one of its members as business man- 
 ager, still the important questions connected with the ad- 
 ministration of a business in the larger sense must come 
 before all; consequently the partnership is fitted for those 
 business enterprises where only a few men co-operate. 
 
 Finally, it follows from this fact that the partnership 
 can ordinarily command only a limited amount of capital, 
 and thus its operations must be confined to those fields 
 where small plants and small establishments operate with 
 the greatest economy. Accordingly partnerships are the 
 characteristic method of organization for conducting small 
 manufacturing establishments, retail stores, brokerage 
 business, contracting on a small scale, and for professional 
 services where the personal element is of importance. For 
 larger undertakings, those requiring a larger investment 
 of capital, the corporate form of organization is better 
 adapted. 
 
 The Corporation. 
 
 The corporation in its most perfect form unites so far 
 as possible the best features of the individual proprietor- 
 ship and the partnership. Like the former it is an indi- 
 vidual from the business and legal point of view; like the 
 latter it is composed of a group of individuals whose cap- 
 ital and skill have been imited into one organic union. 
 
MODERN BUSINESS ORGANIZATION 41 
 
 According to Blackstone, *'the corporation is an artifu-ial 
 person created for preserving in perpetual succession cer- 
 tain rights which being conferred on natural persons only 
 would fail in the process of time." 
 
 The leading characteristic of the corporation is, accord- 
 ing to the above definition, its artificial personality. Be- 
 ing artificial it is created by some act of man, and being 
 a person it is a business unit made up of a group of natural 
 pei-sons who have lost their identity, from the standpoint 
 of the community, for the purpose of undertaking some 
 particular business enterprise. In both these respects the 
 corporation differs radically from the partnership. The 
 partnership is formed by mutual consent and agreement 
 of the parties. The corporation, on the contrary, consid- 
 ered both from the historical and from the present point 
 of view, can be formed only through the foiTnal action of 
 some duly authorized political body, such, for example, 
 as the legislature of one of the states that make up the 
 American Union. 
 
 On this account the development of the corporation has 
 undoubtedly been somewhat slower than would have been 
 the case had individuals been free to unite into corpora- 
 tions simply by signing an agreement to that effect. Un- 
 til comparatively recent times, that is, until early in the 
 last century, corporations were authorized only by a special 
 act of some legislative assembly. Beginning about 1825, 
 however, several states introduced the policy of providing 
 for the formation of coi'porations under a general corpora- 
 tion act, on comphing with the terms of which and pay- 
 ing the required fees of registration, companies were char- 
 tered by some public officer designated for that purpose, 
 generally the secretary- of state. The change from incor- 
 poration by special act to incorporation under a general 
 act was advocated and finally adopted in all the American 
 states for the follo\^ing reasons: Under the fonner meth- 
 od it became customary to grant special privileges to cer- 
 
42 MAURICE H. ROBINSON 
 
 tain corporations backed by powerful interests or by 
 friends in the legislature ; legitimate business interests hav- 
 ing no influence and no friends at court found difficulty 
 in securing a charter at all; moreover, the legislatures were 
 in session only part of the time, and it was often found 
 desirable to form a corporation to undertake some special 
 business enterprise when the legislatures were not in ses- 
 sion. Finally, it came to be generally recognized that free- 
 dom of incorporation rather than incorporation at the will 
 of some political authority was demanded by the legiti- 
 mate business interests of every community. Consequent- 
 ly, under the influence of these three forces, the former 
 method was gradually abandoned, and the method of in- 
 corporation under a general act was almost universally 
 adopted. In some states, however, at the present time, 
 certain kinds of corporations can be formed only by special 
 act of the legislature, and in other states the legislature 
 reserves the right to incorporate companies directly when- 
 ever in their judgment the public interests demand such 
 action. 
 
 In most states, however, since the middle of the nine- 
 teenth century, any group of men can form themselves into 
 a corporation for the purpose of undertaking any legitimate 
 business enterprise, simply by complying with the provi- 
 sions of the general act, filing their charter with the 
 secretary of state and paying the fees required by law. 
 The usual process by which this is accomplished will be 
 described in a subsequent section. 
 
 As a necessary result of the method by which corpora- 
 tions are formed, namely, by an act of some political 
 authorit}^ those in actual existence may lack some of the 
 characteristics which are necessarily present in a theoret- 
 ically perfect corporate organization. Moreover, as would 
 naturally be expected, the earlier corporations have only 
 a portion of these natural characteristics, and even at the 
 present time some corporations which lack some of the 
 
MODERN BUSINESS ORGANIZATION 43 
 
 characteristics that belong to such organizations arc cre- 
 ated by certain states. The four most important of these 
 characteristics will ho clcscril)cd in the following division. 
 
 The Corporate Characteristics. 
 
 In the corporation, as organized at the present time, 
 liability for debts due creditors is by law placed upon the 
 business enterprise which the corporation controls, rather 
 than upon the individuals which compose the corporation. 
 The individual stockholder is consequently relieved of 
 personal liability, and in case of failure loses his financial 
 investment only. 
 
 The adoption of this principle in law has been of slow 
 growth. The Romans, under whose system of jurispru- 
 dence the corjDoration first became important, recognized 
 this principle to a limited extent. It was not, however, 
 until the fifteenth or sixteenth century in England that 
 the corporation achieved much importance in the business 
 world, and even then the limitation of liability was au- 
 thorized in the case of certain corporations only. As a gen- 
 eral feature belonging to all corporations this peculiar priv- 
 ilege of the corporation was not adopted generally until 
 the early part of the nineteenth century. In the United 
 States there were only about half a dozen corporations 
 created before 1789, and the number was exceedingly lim- 
 ited until after the beginning of the nineteenth century. 
 With the advent of railroads, at the end of the first quar- 
 ter of the nineteenth century, corporations were formed 
 in increasing numbers for the purjDose of operating rail- 
 roads, canals, and other important enterprises. In some 
 cases they were granted limited lialjility, but in general 
 it was not until the middle of the last century that this 
 right was generally recognized in the statute law of the 
 various states of the Union. 
 
 In theory the adoption of the principh' of limited lia- 
 bility in law follows from the recognition of the corporate 
 
44 MAURICE H. ROBINSON 
 
 personality, a personality distinct from that of the indi- 
 vidual stockholders who compose it. To conceive the 
 corporation as an individual, one must lose sight of the 
 persons of which it is made up; when this conception is 
 reached, the natural individuals being lost sight of, liability 
 for debt is placed upon the artificial personage in whom 
 all the individual stockholders are merged. In practical 
 affairs, however, the adoption of the principle is to be 
 credited to other causes. In the early part of the nine- 
 teenth century New York and Massachusetts were the 
 leading states from an industrial point of view. Th,e dan- 
 gers of investment in partnerships large enough to carry 
 on the business imdertakings demanded by the times called 
 for changes in the corporation law, of which the most im- 
 portant was the adoption of this particular principle. The 
 legislature of New York saw the opportunity and granted 
 the privilege demanded. The result was a remarkable de- 
 velopment of the corporation and of corporate enterprises 
 in that state. Its adoption in New York was followed by 
 the same action in Massachusetts, and later in other states, 
 with similar results. 
 
 After this principle had been generally adopted, none 
 of the harmful consequences which had been freely pre- 
 dicted followed. Indeed, from a strictly economic point 
 of view there are good and sufficient reasons for its justifi- 
 cation. As already stated, in case of failure, where the 
 principle of limited liability is granted, the burden of the 
 failure is placed upon the business itself rather than upon 
 individuals and other business enterprises in which the 
 individual stockholders have invested. Those who sell 
 goods to a partnership are often glad to extend credit far 
 beyond the point which the business of the firm justifies, 
 especially in cases of probable bankruptcy, in order to 
 collect of some of the wealthy members of the organiza- 
 tion. Those who sell to a corporation, on the contrary, 
 know that the corporate property only is Uable for the 
 
MODERN BUSINESS ORGANIZATION 45 
 
 debt aud hence discretion in extending credit to a corpora- 
 tion is a necessary result. From the standpoint of the 
 stockholder the adoption of this principle has been one of 
 the powerful incentives to save and invest in business 
 enterprises. This, to a certain extent, accounts for the 
 rapid development of industry through the agency of the 
 corporate form of enterprise. In some cases, as for ex- 
 ample, the national banks of the United States, the prin- 
 ciple of limited liability is only partially adopted. Each 
 stockholder is liable not only for the par value of his stock, 
 but for an additional amount equal to such par value. This 
 is called double liability, and is justified on the ground 
 that national banks should be absolutely safe under any 
 and all circiunstances. 
 
 Individuals die, partnerships are terminated by agree- 
 ment and are dissolved for many unforeseen reasons; but 
 corporations theoretically may live forever. When an indi- 
 vidual proprietor dies, it is of course possible that his busi- 
 ness may be transferred to some one else and thus contin- 
 ued. In many cases however such enterprises are aban- 
 doned on account of the failure to find anyone who cares 
 to undertake the proprietorship and management of the 
 l)usiness. AMiere a partnership is dissolved, some of the 
 partners may desire to continue, and they together with 
 other men, may form a new partnership for the conduct of 
 the same business enterprise. It is, however, difficult to 
 find a group of men who are able to work harmoniously 
 in the intimate business relationship which the i)ai'tner- 
 ship demands, and it is usually difficult for any one of the 
 partners to find a person who cares to assume the responsi- 
 bilities which belonged to a former member of the organiza- 
 tion. 
 
 In the case of a corporation, conditions are much more 
 favorable to the continued existence of the organization. 
 As stated by Blackstone, the coi-jDoration is fonned for 
 preserving in perpetual succession rights which otherwise 
 
46 MAURICE H. ROBINSON 
 
 might terminate owing to the death of the individuals to 
 whom they belong. In the corporation this particular fea- 
 ture, namely, perpetual existence of the corporate organ- 
 ization, is accomplished by means of the substitution of 
 one person for another through the transfer of property 
 rights. When A dies, his shares of stock are transferred 
 to his legal heir and the latter takes his place in the corpo- 
 rate organization. Thus it is only by the death of every 
 individual at the same time, an impossible supposition, 
 that the existence of the corporation could be terminated 
 in the ordinary way. Coi-porations are, however, termi- 
 nated by and as a result of their own act, properly author- 
 ized; or where such termination is legally provided for in 
 the articles of corporation; or by an act of the public au- 
 thority by whom they are legally created. Under ordinary 
 circumstances, hoAvever, it is proper to say that the cor- 
 poration enjoys perpetual existence. 
 
 The shares of a corporation are treated as personal 
 property and may be sold at any time without affecting 
 the corporate existence. For this reason the investments 
 are divided into small amounts of such size that the ordi- 
 nary investor may purchase at least one share. Corpora- 
 tions appealing to the smaller investors subdivide their 
 capital stock into shares of smaller denominations, while 
 those which appeal to the larger investors issue their 
 shares in larger amounts. Consequently by a proper sub- 
 division of the capital stock into shares, any portion of 
 the business which the corporation conducts may be sold 
 and transferred from one person to another at any time. 
 In this respect the corporation is in striking contrast to 
 the individual proprietorship and the partnership. The 
 individual proprietor must sell his property as a whole 
 except in cases where it may be operated successfully in 
 parts. To sell a portion of his property without division, 
 in reality creates a partnership of interests. He must 
 therefore find a purchaser who desires just such a business 
 
MODERN BUSINESS ORGANIZATION 47 
 
 enterprise as he has to sell. The partner cannot sell his 
 interests without the consent of all the other partners, 
 and therefore, in order to sell, he must find a man who is 
 personally acceptable to all members of the firm, ordinarily 
 a diflicult task. Moreover, a partner who desires to sell 
 out his interests sometimes finds that his business asso- 
 ciates are too ready to take advantage of his desire to sell 
 unless such contingency has been carefully provided for 
 in the articles of copartnership. Furthermore, the selec- 
 tion of a successor is made doubly difficult owing to the 
 fact that all the partners are managers, and hence the 
 successor of one desiring to sell his interest must be not 
 only an acceptable business companion, but a good busi- 
 ness man. 
 
 In a corporation the management is in the hands of 
 officers selected from the body of stockholders and em- 
 ployes under their direction. The ordinary stockholder, 
 therefore, takes no active part in the management. He 
 can sell his interests without impairing the efficiency of 
 the management. The market for shares in a corporation 
 is consequently much broader than in the case of a part- 
 nership. Those unable to take part in the management, 
 including widows, children, institutions having trust funds, 
 and even other corporations, are in a position to ])urchase 
 and hold shares. For the purpose of making such trans- 
 fers the facilities of a broad market are funiished by the 
 stock exchanges which exist in all the larger cities. 
 
 In its management the corporation is like the individual 
 proprietor. Its control is centralized into one organic unit, 
 a board of directors chosen by the stockholders to repre- 
 sent the coi-poration and to determine its business policy. 
 It thus differs from the partnership where all the members 
 are theoretically at least managers, and where actually all 
 generally take part in the active management. It is of 
 course true, as before stated, that the active management 
 of a partnership may be entrusted to a managing partner. 
 
48 MAUEICE H. ROBINSON 
 
 This, however, is the exception, and not the rule. The 
 general efficiency of the management in a partnership is 
 detennined by the general business ability of all the part- 
 ners; in the corporation the stockholders are by law re- 
 quired to select a few of their number to take active charge 
 of the business policy. While it is possible that in certain 
 cases men of small business capacity have been chosen to 
 act as directors, as a general thing, those having the great- 
 est abilitj^ as business managers are chosen upon the board 
 of directors. The corporation, therefore, possesses all the 
 advantages of the individual proprietor so far as prompt- 
 ness of action and ability to meet emergencies are con- 
 cerned, and all the advantages of the partnership with 
 respect to collective wisdom. 
 
 The authority vested in the central administration is 
 subdivided by departments and subdepartments, as will 
 be more fully exi)lained in the section on operating organ- 
 ization. In their external organization corporations re- 
 semble an army with its general staff, generals, colonels, 
 captains, lieutenants and soldiers. In the corporation the 
 board of directors corresponds to the general staff. Under 
 the board of directors, committees, the president, vice- 
 presidents in charge of important departments, division 
 superintendents, and section bosses, form the complete 
 organization, all resting upon the authority of the central 
 administration. In the organization every detail of ad- 
 ministration is parcelled out; the work of management is 
 specialized; the responsibility is subdivided from the cen- 
 tral office to, the lowest ranks, so that every one has his 
 duty, and methods for determining the efficiency with 
 which each works can be successfully applied. The art 
 of business management under the corporate form of or- 
 ganization becomes a science, and, in our larger corpora- 
 tions, men of the broadest experience and most far-seeing 
 ability are needed to prevent disaster and, much more, to 
 insure success. 
 
MODERN BUSINESS ORGANIZATION 49 
 
 The four characteristics of the coi*poration which have 
 been described above, namely, limited liability, perpetual 
 existence, ability to transfer interests, and centralized 
 management, are features which when coml)ined in organic 
 union, distinguish the corporation from other foiins of 
 business organization. 
 
 Classes of Corporations. 
 
 Corporations may be divided into three main classes, 
 each of which differs in some of the imporiant character- 
 istics, but all are alike in possessing a majority of the 
 features which have just been described. These three 
 classes are (1) municipal corporations, (2) social or ele- 
 emosynary corporations, and (3) business corporations. 
 
 The municipal corporation is a political body organ- 
 ized for the purpose of carrying on certain political and 
 often business functions. An example of this class is the 
 ordinary city. As a corporation it has a perpetual exist- 
 ence and a centralized government. Furthennore the 
 property of individual citizens cannot be taken to satisfy 
 the debts which the city government owes. The city, how- 
 ever, lacks one of the ordinary characteristics of the corpo- 
 rate organization, namely, a citizen cannot sell his citi- 
 zenship and thus dispose of his portion of the city's prop- 
 erty. When he leaves the city domains he relinquishes all 
 rights to his investment in the city, which by the payment 
 of taxes he has helped to accumulate. 
 
 The club, the church, the hospital, the university, are 
 examples of social corporations. In all of these organiza- 
 tions the liability of the individual member is limited by 
 his investment, and the organization is perpetuated l)y the 
 initiation of new members. In each case they select a board 
 to conduct the business, and again are like the municipal 
 corporation in respect to the right of the individual to 
 transfer his investment. '\Vhen a person resigns from a 
 
 club, he loses his right to a share in the common property. 
 B— n— 4 
 
50 MAURICE H. ROBINSON 
 
 He cannot sell his membership. The same is true of the 
 other organizations comprised within this particular class. 
 
 Business corporations differ in their important charac- 
 teristics from the above two classes in one respect only, 
 namelj^, the interest of each individual is represented by 
 a share called a stock certificate, which can be transferred 
 as other personal property. This is a natural result of the 
 purpose for which business organizations are formed, 
 namely, to utilize the capital and skill of the members in 
 earning the profits to be divided among themselves. Mu- 
 nicipal and social corporations, on the other hand, while 
 engaged in perfomiing some useful work in the service 
 of their members or of the community, use the results of 
 their work as a common fund and, except at the termina- 
 tion of their existence, such corporations do not subdivide 
 their surplus earnings. 
 
 Business corporations are generally subdivided into 
 classes based upon the character of the work which they 
 undertake, as industrial corporations, commercial corpo- 
 rations, public service corporations, and financial corpo- 
 rations. The first includes all classes of manufacturing 
 plants and mining companies. The second includes whole- 
 sale and retail stores; the third class includes railroads, 
 electric traction companies, gas companies, electric light 
 companies, water supply companies, etc. The last class 
 includes banks, trust companies, and insurance companies. 
 
 This classification is of importance for two reasons: 
 First, public authorities when granting charters determin- 
 ing the conditions under which corporations may live and 
 operate, grant more extensive powers to the last-named 
 classes, but at the same time regulate their internal affairs 
 and their business operations with much greater strict- 
 ness. Hence in the corporation act of various states there 
 are ordinarily at least three parts — one under which the 
 industrial and commercial corporations are chartered, one 
 under which public service corporations are chartered, and 
 
MODERN BUSINESS ORGANIZATION 51 
 
 a third authorizing the formation of the financial and 
 moneyed corporations. The conditions of organization and 
 their rights during existence differ widely in the various 
 classes. In addition to obtaining their charter, public 
 service corjDorations are usually obliged to obtain certain 
 privileges called franchises from the municipality or terri- 
 tory within which they cany on their business. Indus- 
 trial and commercial corporations, on the other hand, are 
 in a position to do business as soon as their charter is 
 granted by the state. 
 
 Since corporations chartered under the various sections 
 of the corporation act are ordinarily kept distinct by state 
 officials, it is often possible to secure statistics showing 
 the amount of investment, the size of corporations, and the 
 general character of their operations in each one of the 
 particular kinds of business enteiprises which have been 
 described. This feature of the corporation law is thus of 
 considerable importance in enabling the economist, legis- 
 lators and business men to compare development in the 
 various lines of business enterprise, and draw conclusions 
 that are of vahie in relation to the industrial development 
 of any particular state or section. 
 
 Advantages and Disadvantages. 
 
 The advantages resulting from the important charac- 
 teristics of the corj^oration, as given above, namely, limi- 
 tation of liability of the individual stockholder, perma- 
 nence of the corporate existence, transferability of rights 
 in the corporation, and its centralized foiTn of government, 
 have led to its extensive adoption in recent years. In ad- 
 dition to the characteristics already described, it has the 
 advantage of great flexibility in the number of those inter- 
 ested and in the amount of capital which it employs. A 
 corporation can be formed in many states having as few 
 as three stockliolders, or it may have any number. In 
 some states a corporation may be fonned composed of only 
 
52 MAURICE H. ROBINSON 
 
 one person and therefore having only one stockholder. In 
 this respect it differs markedly from the individual pro- 
 prietor or the partnership. By definition, the individual 
 proprietor is limited to one person; for practical reasons 
 the partnership is limited to comparatively few and at- 
 tains its greatest success when it unites from three to ten 
 pei*sons only. In rare cases partnerships have been formed 
 with twenty or more members; such partnerships repre- 
 sent an unusual type and are usually disrupted owing to 
 internal dissensions. 
 
 Owing to its flexibility in numbers, the corporation may 
 have either a small capital or a large capital, according to 
 the nature of the business which it is formed to operate. 
 It therefore may compete with the individual proprietor 
 and the partnership in its economy in the use of capital, 
 and it may under other circumstances comprise a sufficient- 
 ly large number of people to gather the amount of capital 
 sufficient to conduct the business of an entire industry. 
 
 In contrast with the advantages of the corporation it 
 is well to notice that there are certain disadvantages that 
 necessarily belong to this form of organization. In the 
 first place, as the corporation is a creature of the state, 
 it is usual to charge certain fees for incorporation of a 
 business enterprise in the corporate form. The fees 
 charged vary in different states from a merely nominal 
 amount in some, to an amount that constitutes a tax upon 
 the industry in others. Most states also charge an annual 
 license fee which must be paid regularly in order that the 
 corporation may continue its existence. In addition to 
 these fees for incorporation and for continued existence, 
 some states provide a special form of taxation for corpo- 
 rations, and thus discriminate against this form of organ- 
 ization as compared with the individual proprietor or the 
 partnership. A most marked example of this kind has 
 recently been enacted by the United States Congress in 
 the foi-m of the Federal Corporation Tax, requiring all 
 
MODERN BUSINESS ORGANIZATION 53 
 
 corporations operating in the United States to pay to the 
 national treasury annually one per cent of their net profits. 
 Tliis tax, it is expected, will yield something over twenty- 
 five million dollars annualh', representing the l)U]'den of 
 the entire amount of the tax upon enterprises conducted 
 under the coi-porate form. 
 
 In the second place, the states usually require corpo- 
 rations to make certain reports to the secretaiy of state, 
 showing their financial condition and other details in re- 
 gard to their internal organization. In most cases such 
 reports may be prepared directly from the annual state- 
 ments made by the company's auditors. In certain cases, 
 however, as, for instance, the railroads in the United States, 
 the annual report must be filed as of the thirtieth of June, 
 whereas a large number of the corporations make their 
 reports cover the period from January first to December 
 thirty-first. This necessitates considerable additional ex- 
 pense owing to the preparation of accounts covering a dif- 
 ferent period from that which the company's books in- 
 clude. Again, states in many cases require details which 
 would not ordinarily be furnished by the regular books 
 of the company thus causing additional expense on this 
 account. 
 
 In the third place, the corporate form of organization 
 necessitates an annual meeting of the stockholdei^ and tlie 
 preparation of elaborate reports for their information. 
 While most of the stockholders are represented by proxy, 
 the expense of the annual meetings cannot be entirely dis- 
 regarded. Tliis expense, however, is one that would be 
 entailed upon any large organization. 
 
 In the fourth place, the corporation is managed by 
 men who are employed for the purpose and paid for their 
 work. The individual proprietor works for himself and 
 receives all the profits directly. In the parinership each 
 one ordinarily feels the direct connection between his work 
 and its reward. The managers of a corporation, being paid 
 
54 MAURICE H. ROBINSON 
 
 for their services, are not under the same influence as the 
 individual proprietor and the partner. It is therefore 
 necessary to ajDply elaborate means for the purpose of se- 
 curing efficiency in management. This is done in many 
 cases by the use of statistical averages comparing the re- 
 sults of one manager with those of another, and making 
 the comiDensation depend largely upon the results of the 
 business under the charge of any particular officer or em- 
 ploye. Such means of securing efficiency, however, are ex- 
 pensive and the corporation must always be willing to 
 undertake such expenses, considering them the necessary 
 disadvantages of this particular form of organization to 
 be compensated by some of the various advantages which 
 have been named above. 
 
 In the fifth place, the credit of a corporation depends 
 entirely upon its capital and its business. The credit of 
 the individual j)roiDrietor depends not upon any par- 
 ticular business enterprise, but upon the proprietor's 
 entire resources. The credit of the partnership is de- 
 pendent upon the entire resources of all the partners 
 combined. Consequently, in comparison with these forms 
 of organization, the corporation is often unable to ex- 
 tend its credit to the extent that is possible in the case 
 of the individual proprietor or the partnership. While this 
 limitation of credit is desirable from the standpoint of 
 industrial development as a whole, it is often a distinct 
 disadvantage to individual corporations. 
 
 Notwithstanding these several disadvantages, the cor- 
 poration, owing to its marked advantages over other forms 
 of organization, has shoT^Ti remarkable progress and de- 
 velopment in the last half century. To quote from an arti- 
 cle by the author, contributed to the Yale Review: ** For- 
 merly nearly all manufacturing was done by the individual 
 entrepreneur, later by the partnership, now by the corpo- 
 ration; of the total production in the year 1900, nearly 
 eight thousand millions in dollars, or almost 60 per cent 
 
MODERN BUSINESS ORGANIZATION 
 
 55 
 
 of the total output, was the work of the corporation. Out 
 of over five hundred thousand independent e.stalili.shments 
 in the United States, forty thousand in round numbers 
 were in corporate fomi. The corporations were 12 per 
 cent in number and produced 59.5 per cent of the output. 
 The partnerships were 18.9 per cent of the total number 
 of the establishments, producing 19.7 per cent of the total 
 production. Individuals owned 78.8 per cent of the num- 
 ber of establishments and produced only 20.6 per cent of 
 the total amount of production. In certain lines the 
 progress of the corporation has been particularly rapid, 
 namely, in the manufacture of iron and steel, agricultural 
 implements, coke, gas, electrical apparatus, manufactured 
 ice, rubber goods, photographic goods, etc., etc. Thus con- 
 centration is accomplished through the corporation, and to- 
 day, in a word, the cor2)oration problem has to all intents 
 and purposes superseded the trust problem of the previous 
 decade." 
 
 Since 1900 the United States census has separated all 
 the manufacturing establishments in the United States 
 into four classes, as follows: The individual proprietor. 
 
 Character of 
 
 Ownership * 
 
 
 
 
 
 Establij 
 
 .hments 
 
 
 1905 
 
 1 
 
 1900 
 
 
 Number 1 
 
 Per cent 
 
 1 Number | Per cent 
 
 United States 
 
 216,262 1 
 
 100.0 1 
 
 273,705 100.0 
 
 Individual 
 
 
 113.961 
 
 52.7 
 
 22.2 
 
 23.6 
 
 1.5 
 
 171.843 
 
 62,627 
 
 37,161 
 
 2,074 
 
 62 8 
 
 Firm 
 
 47,942 
 
 51,156 
 
 3,203 
 
 22 9 
 
 Incorporated Co. . . . 
 Miscellaneous 
 
 13.6 
 0.7 
 
 
 Products 
 
 
 1 
 Value 
 
 905 
 
 
 1 1900 
 
 
 1 
 
 Per cent 
 
 Value 1 Per cent 
 
 United States 
 
 $14,802,147,087 | 
 
 100.0 
 
 1 $11,701,295,854 1 li») n 
 
 
 
 
 Individual 
 
 1,702.980,808 
 
 1 11.5 
 
 14.4 
 
 73.7 
 
 0.4 
 
 1.837,599,35 
 
 1 
 
 15.7 
 
 Firm 
 
 2,132,619,830 
 
 10,912.080,421 
 
 54,466,028 
 
 2.220,833.804 
 
 7.600.019,056 
 
 30,843.641 
 
 19 
 
 Incorporated Co 
 
 Miscellaneous 
 
 O.'i.O 
 0.3 
 
 
 
 
 
 
 
 ♦Special reports of the Census Oflice. Manufacturers, Pt. I, 1903, p. liv. 
 The tables, vhile not exactly comparable, are sufficiently accurate for our 
 purpose. 
 
56 MAURICE H. ROBINSON 
 
 the partnership, the incorporated company, and miscella- 
 neous fomis of business organizations. From the informa- 
 tion thus gathered it is possible to measure the gro^Yth of 
 the corporation as compared with other forms of business 
 organization, at each of the census periods. The table on 
 page 55 shows the changes in the character of the busi- 
 ness organizations that took place in the five years from 
 1900 to 1905. It is probable that the rate of growth which 
 the corporation maintained in the years from 1900 to 1905 
 has been at least equal during the period from 1905 to 1910. 
 
 rrr. the formation of the corporation. 
 
 Promotion. 
 
 The individual proprietor, having command of the nec- 
 essary capital, can engage at once in any lawful business 
 without formality of any kind. The formation of a part- 
 nership is somewhat more complex since it requires the 
 agi^eement of several men, each contributing a share of the 
 capital, and each, under ordinary circumstances, taking 
 part in the management of the business. When the capital 
 has been collected and the terms of the partnership ar- 
 ranged, the firm may then purchase its plant and ma- 
 chinery, appoint superintendents, hire laborers, and at once 
 set out ujDon its business career. 
 
 Like the partnership, the corporation requires an agree- 
 ment among several men to contribute capital to engage 
 in a particular line of business. It does not, however, re- 
 quire an arrangement between the parties to undertake 
 the active work of management. In order to form a corpo- 
 rate organization the voluntary action of a group of men 
 is necessary, such group in certain cases meeting by agree- 
 ment and drawing up the terms under which they are will- 
 ing to engage in some particular enterprise. While this 
 method is common in small undertakings, it is not adapted 
 to the foimation of large companies. Owing to the fact 
 
MODERN BUSINESS ORGANIZATION 57 
 
 that subscribers to the shares of stock in a corporate 
 enterprise usually live in widely separated districts, the 
 larger corporations are promoted by some pei'son who de- 
 votes his time to formulating a plan for the formation of 
 the corporation, securing the necessary subscribers to the 
 capital stock, and arranging the details connected with the 
 beginning of its legal existence. The task of the promoter 
 consists in finding and selecting the opportunity for under- 
 taking some profitable business enterprise, securing the 
 necessary capital, and providing at the beginning efficient 
 management. 
 
 After selecting the enterprise, the important work of 
 the promoter is in securing the necessary capital. This 
 may be accomplished either by personal solicitation or by 
 advertisements in the public press. In smaller corpora- 
 tions, especially those having a local constituency, the per- 
 sonal solicitation of shareholders is the usual method em- 
 ployed. AVliile more expensive, it has the advantage of a 
 direct appeal to the individual and gives the opportunity 
 of placing before him sufficient of the details of the organ- 
 ization and business to enlist his support. In the formation 
 of larger enterprises, it is usual to insert advertisements 
 in the financial and sometimes the daily press, appealing 
 to the general public through a statement showing the 
 character of the enterprise, the securities proposed to be 
 issued, and usually includes a statement of prospective 
 earnings. In either case, when the subscriptions are com- 
 pleted, the promoter must take out a charter or certificate 
 of incoi-poration from some political body duly authorized 
 to grant the same. 
 
 The Choice of a State. 
 
 In centralized governments like England and Prance, 
 charters for business enterprises are obtained only from 
 the central government and consequently the promoters 
 have no opportunity to choose between several states, each 
 
58 MAURICE H. ROBINSON 
 
 authorized to grant charters. In federal governments, like 
 the United States and Australia, there is usually an oppor- 
 tunity to choose between the different governments. For 
 some enterprises in the United States, however, a federal 
 charter is required; for example, a banking organization 
 desiring to undertake national banking functions. In this 
 case the proposed organization has the choice between a 
 state charter authorizing it to become a state bank, or a 
 national charter authorizing it to become a national bank. 
 In the former case it is for practical reasons limited to the 
 ordinary commercial work of the bank; in the latter case 
 it may, in addition, undertake the work of issuing its own 
 bank notes and circulating them in the form of paper 
 money. 
 
 In the case of an ordinary corporation desiring to en- 
 gage in business of a general nature, such as manufactur- 
 ing, trading, etc., it is at the present time necessary to se- 
 cure a charter from some one of the individual states. In 
 the case of banks, railways, and public service corpora- 
 tions, it is in practically all cases necessary to have a 
 charter from the state in which the business of the corpo- 
 ration is to be located. For manufacturing and trading 
 concerns the case is different. Ordinarily such a corpora- 
 tion may take out a charter either in its own state, or in 
 any one of a considerable number of states which permit 
 the formation of corporations, to do business either within 
 its o^\^l borders, or in other states. Consequently the pro- 
 moter, having the choice of a number of jurisdictions, is 
 in a position to select that one which he considers most 
 favorable to the future success of the corporation which 
 he is forming. While the general provisions of the various 
 states have a striking similarity, they differ in a number 
 of points which are of considerable importance to the 
 future of a corporation. 
 
 In some states the corporation law and policy are well 
 settled and those incorporating under such states have 
 
MODERN BUSINESS ORGANIZATION 59 
 
 reason to believe that the policy observed in the past is 
 likely to be continnod in the future. Such conditions at- 
 tract legitimate ])usiness enterprises. Again, the fees 
 charged b}' the state for incorporating a company and for 
 the annual license differ widely. For example, Arizona 
 charges ten dollars for the incorporation of any company, 
 without regard to the amount of its capitalization, while 
 Connecticut charges twenty-five dollars for the incorpora- 
 tion of a company having a capital of $10,000 to $50,000, and 
 one dollar for every $2,000 of capital stock authorized of 
 $50,000 or more. Tlie rate in New York is the same as that 
 of Connecticut. New Jersey has a more liberal policy 
 than Connecticut, but much more conservative than Ari- 
 zona. The New Jersey rates are twenty-five dollars for 
 any corporation up to $100,000, and for corporations above 
 this amount twenty cents for every $1,000 of the total 
 amount of capital stock authorized. Maine, fonnerly one 
 of the more conservative states, has recently entered upon 
 a policy of granting charters upon favorable teims, and 
 requires a fee of ten dollars for $10,000 capitalization, fifty 
 dollars for a corporation from $25,000 to $500,000 inclu- 
 sive; and for corporations above $500,000, one dollar for 
 every $10,000 of authorized capital stock. 
 
 Again, the states differ considerably in regard to the 
 liberality of the charter. Some limit the amount of capital 
 stock that may be issued, some require that the directoi's' 
 and stockholders' meetings shall be held within the state 
 from which the corporation has its charter, some require 
 that the capital stock shall be paid for in money, and some 
 forbid corporations from o^^Tiing shares of stocks in other 
 coi-porations. Accordingly, if a coi^poration desires to issue 
 $25,000,000 worth of stock, it could not take out a New 
 Hampshire charier, where the amount of authorized capital 
 is limited to $5,000,000. Tf it wished to hold a stockholders' 
 meeting outside of the state, it could not take out a New 
 Jersey charter. If it desired to hold stock in other corpo- 
 
60 MAURICE H. ROBINSON 
 
 rations, it could not take out an Illinois charter. The pro- 
 moters, therefore, after determining upon the character of 
 the enterprise, select the state, having regard to the various 
 points mentioned, choosing that which they consider most 
 favorable to the corporation which they are forming. At 
 the present time, New Jersey, Maine, Delaware, Arizona, 
 Nevada and South Dakota, and several other states, are 
 called the leading charter-granting states on account of the 
 lower fees and the more liberal terms granted to incorpo- 
 rators. 
 
 In some cases corporations take out charters in several 
 states, for example, railways operating lines in adjoining 
 states. Such charters are usually identical in terms, so far 
 as practicable, and have the same stockholders and the 
 same officers. On account of their practical identity it 
 has become a fairly well-settled principle of law to regard 
 such corporations as a single corporation. 
 
 The Process of Formation. 
 
 Each state prescribes a routine method which must be 
 followed under its corporation law, by those who desire 
 lo take out a charter. The process is in its general details 
 quite similar, but differs in certain particulars. For pur- 
 poses of illustration the routine prescribed by the states of 
 Illinois and New Jersey have been selected and are given 
 below. 
 
 The general corporation act of Illinois provides that 
 any number of persons, from three to seven inclusive, de- 
 siring to form a corporation, may file a statement with the 
 secretary of state, giving the name of the proposed corpo- 
 ration, the objects for which it is formed, the amount of 
 the capital stock, the number of shares and the value of 
 each, its principal office and the period for which it is to 
 be formed, not to exceed ninety-nine years. The statement 
 above described must be signed by each incorporator and 
 acknowledged before some ofl&cer authorized to acknowl- 
 
MODERN BUSINESS ORGANIZATION 61 
 
 edge deeds. This statement is then sent to the secretary 
 of state and, if the purpose for wliich it is proposed to form 
 tlie corporation is lawful, the said officer issues a pennit 
 authorizing the incorporators to act as commissioners to 
 open books for the purpose of securing subscriptions to 
 the capital stock. 
 
 After being properly authorized, the commissioners 
 open the books to secure subscriptions for the full amount 
 proposed in the original statement. When the full amount 
 is subscribed, the commissioners call a meeting, giving 
 the proper notice, for the organization of the corpo- 
 ration and the election of officers. The officers then col- 
 lect at least one-half of the total amount subscribed, and 
 make a full report of the meeting, giving the subscription 
 list, the amount paid in upon the same, whether any of 
 the capital stock has been paid for in property and if so 
 the fair cash value of the property, and the names of the 
 directors. This report must be signed by a majority of 
 the commissioners and filed in the office of the secretary 
 of state. The secretary of state then issues the charter 
 which upon its receipt is filed in the office of the recorder 
 of deeds of the county in which the chief office of the corpo- 
 ration is located. The company then is legally organized 
 and must proceed to business within tw^o years from the 
 date when its charter is issued or the charter will be legally 
 forfeited. 
 
 As compared with the Illinois method, that prescribed 
 by the State of New Jersey in the general corporation act 
 is exceedingly simple. Under the New Jersey law, three 
 or more natural persons may draw up an agreement for the 
 purpose of forming a corporation under the general corpo- 
 ration act, specifying the name, the objects for which it 
 is formed, the amount of stock, and the period for which 
 it is formed. They may then secure subscriptions to the 
 full amount of the capital stock, requiring each subscriber 
 to sign his name showing the amount for which he sub- 
 
62 MAURICE H. ROBINSON 
 
 scribes and liis post-office address. The charter as drawn 
 up, with its subscribers, must then be approved in the same 
 manner as is required by law in the case of deeds for the 
 transfer of real estate. It is then recorded in the office of 
 the clerk of the county where the principal office of the 
 corporation is located, and finally is filed with the secretary 
 of state, when its legal existence begins. 
 
 The Capitalization. 
 
 It will be noticed that in each case the capitalization 
 must be determined before the corporation enters upon its 
 legal existence. By capitalization is meant all stocks and 
 bonds issued, or in a more limited sense of the word, the 
 total amount of stock authorized. The capitalization may 
 be equal to the amount of assets which the corporation 
 possesses, or it may be greater or less than the assets. 
 When the stocks and bonds issued by the corporation are 
 sold at par, the amount of capitalization will be equal to 
 the amount of assets; if they are sold above par, the assets 
 will exceed the capitalization; and if either one or both 
 are sold at less than par, the capitalization will exceed the 
 assets and the stock is said to be watered or the corpora- 
 tion over-capitalized. 
 
 Having determined upon the operation of a particular 
 kind of business, the promoters are in a position to decide 
 the amount of assets which are necessary in order to prop- 
 erly carry on the business. Suppose, for example, it has 
 been decided to engage in the manufacture of pianos. The 
 promoters ask how much capital is required to manufac- 
 ture pianos at a low cost at the point where the factory is to 
 be located. If they find themselves unable to raise the 
 amount of capital necessary to imdertake such a business 
 in the proper way, then their project should be abandoned 
 or the corporation should devote itself to some other busi- 
 ness enterprise requiring a smaller amount of capital. On 
 the other hand, it is possible to extend the field from which 
 
MODERN BUSINESS ORGANIZATION 63 
 
 subscribers are originally selected and thus secure a larger 
 amount of capital by appealing to a larger constituency. 
 
 Assuming that the enterprise has been selected and that 
 the promoters find themselves able to raise the necessary 
 amount of capital, they must then decide how much of this 
 capital should be in the form of bonds and how much in 
 the fonn of stock. The bondholder is, from the broader 
 point of view, a member of the corporation who has relin- 
 quished any right which he might have had in directing 
 the management of the enterprise, for the sake of having 
 his property secured bj" a first claim upon the assets. He 
 receives a lower rate of return as compensation for the 
 security he receives. Since many investors desire safety 
 above everything else, and are not in a position to take part 
 in the management, a considerable portion of the capital 
 of ever^" business enterprise is borrowed, and under the 
 cori)orate form of organization those who subscribe in this 
 way hold bonds as evidence of their contributions. If 
 bonds are issued above the value of the property at a forced 
 sale, under the most unfavorable conditions, it is usually 
 Impossible to sell them at their face value unless the rate 
 of interest is made unduly high. Consequently those form- 
 ing the corporation find it desirable to borrow only a lim- 
 ited portion of the capital upon bonds, and make the rate 
 of interest fairly low. 
 
 Having determined the amount that may be raised by 
 the issue of bonds, all the remaining capital must neces- 
 sarily be subscribed by the stockholders. In the issuing 
 of stock, the simplest method is to issue one kind only, 
 which is then called common stock. Since the stock is all 
 alike, there is no opportunity for discrimination among 
 classes of stockholders; all have the same rights, all take 
 the same risks, and all share the losses and the profits 
 equally. By subtracting the amount received from the 
 bond issue from the total amount of capital necessary for 
 the proper operation of the business, the amount which 
 
64 MAURICE H. ROBINSON 
 
 must be secured through subscriptions to the capital stock 
 is determined. By dividing this amount into shares of a 
 certain amount, for example, $100, the number of shares 
 may be calculated and if the stock is sold at par, when all 
 the stock is subscribed for and the subscriptions collected, 
 the corporation will be in possession of that amount of 
 capital which the promoters consider necessary for the par- 
 ticular business which it is to undertake. 
 
 In recent years the practice has grown up of dividing 
 the stock into two classes called common and preferred. 
 Preferred stock has a superior claim to the dividends or to 
 the assets of a corporation in case of dissolution or death, 
 as may be provided in the charter or by-laws. Preferred 
 stock is thus an intermediate security between bonds and 
 common stock. It is usually granted dividends up to a 
 certain rate, as, for example, seven per cent. If the corpo- 
 ration earns seven per cent only upon the preferred stock 
 in excess of the bond interest, then the holders of the pre- 
 ferred stock may receive the full amount of their dividends. 
 In such a case, however, the common stockholders would 
 receive no dividends at all. Preferred stock may be either 
 cumulative or non-cumulative. Wherever preferred stock 
 is made cumulative, all the dividends up to a specified rate 
 become a preferred charge upon the earnings and accumu- 
 late from year to year, in case they are not paid, to the 
 credit of the preferred stockholders. Hence if a corpora- 
 tion is unable to earn the rate specified on the preferred 
 stock, through a period of several years, and then, owing 
 to improved conditions, increases its earning power suffi- 
 ciently to pay both the preferred dividends and declare 
 a substantial dividend on the common stock, the excess 
 earnings, after the preferred dividend is paid, must go to 
 make up the dividends due the preferred stock in past years 
 and which have been withheld owing to a lack of earnings. 
 Preferred stock is also issued having the right to share 
 the profits with the common stock. In such cases it is 
 
MODERN BUSINESS ORGANIZATION 65 
 
 usual to provide that the prot'crrod stock shall 1)0 out it led 
 to a certain rate, usually seven per cent; then out of the 
 excess eaniings the common stock shall he entitled to a sim- 
 ilar amoimt, and the two classes of stock shall then share 
 equally in the excess profits. 
 
 Preferred stock is sometimes issued, in which the hold- 
 ers have the right to elect a majority of the directors, while 
 the common stockholders elect the minority. In such cases 
 the real control of the corporation is hy its charter en- 
 trusted to the preferred stockholders, permitting the com- 
 mon stockholders, however, a minority representation upon 
 the board. Ordinarily preferred stockholders have one 
 vote for one share, in common with all shareholders. Some- 
 times, however, preferred stockholders have no voting 
 rights so long as the dividends specified in their stock are 
 regularly paid; but if, for any reason, the directors, repre- 
 senting the common stock, are unable to pay such divi- 
 dends, then automatically the election of directors passes 
 over into the hands of the preferred stockholders and re- 
 mains in their power until the dividends upon the pre- 
 ferred stock have been paid regularly for the period of 
 time specified in the charter. 
 
 Preferred stock is sometimes further divided into class- 
 es, as, for example, first preferred and second j^referrod. 
 In such cases the first preferred have prior rights over 
 the second preferred and usually are granted a lower rate 
 of dividends, on account of the fact that they have the first 
 right to dividends and the first right to a share in the assets 
 in case the corporation is dissolved. 
 
 Tlius where a corporation is organized with bonds and 
 two classes of preferred stock, the security holders are 
 divided into four classes, each having its own special rights 
 and privileges, as provided in the chni'ter and by-laws, the 
 bonds taking precedence over the first preferred stock in 
 point of security, b\it ordinarily having no rights in man- 
 agement, the common stock taking precedence over all the 
 
 B— 11— B 
 
66 MAURICE H. ROBINSON 
 
 other securities in the right of management, but coming 
 after all the others in its right to share in the earnings 
 and the assets. 
 
 Where preferred stock is issued it is desirable to make 
 the bond issue relatively small and thus make the preferred 
 stock take the place of certain of the bonds of a less de- 
 sirable character, giving them at the same time the right 
 to vote for the directors. Preferred stock thus resembles 
 very closely the income bond with voting power, especially 
 where the stock possesses cumulative rights. Under any 
 circumstances, the total amount of preferred stock, plus 
 the bonds, ought not to exceed the value of the tangible 
 assets. Consequently the larger the bond issue, the less 
 the preferred stock, and the less the bond issue the larger 
 the amount of preferred stock which may be properly 
 issued. Under such circumstances the preferred stock be- 
 comes a high-class security, gi^^ng a fairly large rate of 
 earnings, and permitting the holders to take part in the 
 election of directors. Such securities are, however, de- 
 pendent upon the earning power of the corporation for 
 their dividends, and therefore must always partake more 
 or less of the speculative characteristics. 
 
 Wherever bonds and preferred stock have been issued, 
 the common stock represents a contingent interest in the 
 corporation, and the holders of such securities are in a po- 
 sition to receive all of the profits over and above what is 
 necessary to pay interest on the bonds and the specified 
 rate of interest upon the preferred stock. If, then, the 
 earnings of the corporation be small, the preferred stock- 
 holders are unable to receive their full rate of the dividends 
 and in certain cases may receive no dividends at all. If 
 however the earnings are large, the preferred stockholders 
 can receive under any circumstances only the specified rate, 
 and all the excess earnings go to the common stockholders. 
 Consequently the amount of common stock issued is not 
 a matter of great economic importance. The value of the 
 
MODERN BUSINESS ORGANIZATION 67 
 
 common stock must, of course, equal the total assets less 
 the amount of preferred stock plus the bonds. This is best 
 shown by the following balance sheet : 
 
 BALANCE SHEET. CORPORATION A. 
 
 Assets. Liabilities. 
 
 Plant, machinery, etc $10,000,000 Accounts $ 1,000,000 
 
 Bonds 4,000,000 
 
 Preferred stock 3.000,000 
 
 Common stock 2.000,000 
 
 $10,000,000 $10.000,(X)0 
 
 The $2,000,000, which is the value of the common stock, 
 may be represented either by 20,000 shares at $100 each, 
 or by 2,000,000 shares at one dollar each. To represent 
 the $2,000,000 of common stock it is also possible to issue 
 100,000 shares and call each share w^orth $100. In such 
 a case the par value of the stock w^ould be $100. Its value, 
 however, determined from the assets, is only $20 per share, 
 and, in a market where values were properly adjusted, it 
 would be selling at about that figure. This process of in- 
 flating the common stock issue may have any one or all of 
 the following results: First, it may deceive prospective 
 purchasers as to the real value of the property. In dra^^'ing 
 up a balance sheet it is unusual to disclose the real facts and 
 place the common stock at $20 per share. The common 
 practice is to list the common stock at its full value and in- 
 flate the asset account by a fictitious entry in order to make 
 the accounts balance. This is represented in the following 
 balance sheet: 
 
 BALANCE SHEET. CORPORATION B. 
 
 Assets. Liabilities. 
 
 Plant, machinery $10,000,000 Accounts $1,000,000 
 
 Good-will 8,000,000 Bonds 4,000.000 
 
 Preferred stock 3,000.000 
 
 Common stock (100,000 
 
 shares @ $100) 10.000.000 
 
 $18,000,000 $is.noo.ooo 
 
 r : ■ 
 
 Instead of inserting the amount under its own title as 
 above, imder the heading of '*Grood-Will," it is also common 
 
68 MAURICE H. ROBINSON 
 
 to include the amount with the plant and machinery and 
 call the whole, "Plant, machinery, etc.," as shown in the 
 following: 
 
 BALANCE SHEET. CORPORATION C. 
 
 Assets. Liabilities. 
 
 plant, machinery, etc $18,000,000 Accounts $ 1,000,000 
 
 Bonds 4.000,000 
 
 Preferred stock 3,000,000 
 
 Common stock (100,000 
 
 shares @ $100) 10,000,000 
 
 $18,000,000 $18,000,000 
 
 The proper method of stating the condition is to show 
 the stock, bonds, etc., at their full value, and list all the 
 assets at their real valuation, and if the assets are less than 
 the liabilities, insert the amount under the title of "De- 
 ficit" showing the exact status. This is shown in the fol- 
 lowing: 
 
 BALANCE SHEET. CORPORATION D. 
 
 Assets. Liabilities. 
 
 Plant, machinery $10,000,000 Accounts $1,000,000 
 
 Deficit 8,000,000 Bonds 4,000,000 
 
 Preferred stock 3,000,000 
 
 Common stock (100,000 
 
 shares @ $100) 10,000,000 
 
 $18,000,000 $18,000,000 
 
 If the assets exceed the liabilities, then there is a sur- 
 plus which belongs to the stockholders and, under ordin- 
 ary circumstances, to the common stockholders. This 
 condition is shown in the following: 
 
 BALANCE SHEET. CORPORATION E. 
 
 Assets. Liabilities. 
 
 Plant, machinery $10,000,000 Accounts $1,000,000 
 
 Bonds 4,000,000 
 
 Preferred stock 3.000,000 
 
 Common stock (10,000 
 
 shares @ $100) 1,000,000 
 
 Surplus 1,000,000 
 
 $10,000,000 $10,000,000 
 
 t ' 
 
 It will be seen from the above that while the par value 
 of the stock issued has no effect upon the assets of the com- 
 
MODERN BUSINESS ORGANIZATION 69 
 
 pany, and therefore none upon the real value of the stock, 
 it is likely that the issiiinj:^ of stook in excess of the assets 
 may lead directors to adopt the policy of inflating the as- 
 sets and thus deceive prospective investors ^vho have no 
 means of knowing the real condition of affairs and unwise- 
 ly estimate the value of the stock from the reports of the 
 company. 
 
 In the second place, those in active charge of the ac- 
 counts of the corporation may deceive the other stockhold- 
 ers of the company in exactly the same way. Those in 
 actual control, however, knowing the true condition of af- 
 fairs, are in a position to take advantage of the deception 
 practiced upon the other stockholders, and thus by the pur- 
 chase and sale of stock, add to their o^^^l income at the ex- 
 pense of their fellow members within the corporation. 
 
 In the third place, the corporation is founded upon the 
 theor}^ that each share of stock has been paid fur in full in 
 cash or its equivalent. Consequently if the corporation 
 has been properly organized, each share of stock as deliv- 
 ered has behind it its full value in real ]~>roperty. Upon this 
 theoiy the principle of limited liability is founded and 
 justified. Each stockholder may lose all of his invest- 
 ment, but may not be called upon to contribute anything 
 in addition to satisfy the claims of creditors. Where stock 
 has been purchased at a discount, obviously the assets are 
 less than the face value of the stock, and in case of bank- 
 ruptcy, the creditors, not having the right to demand satis- 
 faction from the individual stockholders, nuist rely upon 
 the real assets of the company. AMiere the assets are less 
 than appears from their face, the creditors in many cases 
 receive only a small percentage of the face value of their 
 claims. Under such circumstances, when a corporation 
 becomes bankrupt, as corporations sometimes do, the courts 
 have held that those stockholders who have not paid in 
 full for their stock must do so in order to satisfy the claims 
 of the creditors; that is, they must pay up the balance upon 
 
70 MAURICE H. ROBINSON 
 
 their stock, making it in reality full paid. Stock is ordina- 
 rily issued as full paid and non-assessable. Such stock is 
 often sold at one-quarter, or even a less part, of its face 
 value. Under such circumstances, the majority of the 
 stockholdei's cannot by vote assess the stock in the corpo- 
 ration. Where a corporation becomes bankrupt, however, 
 and it is found that the stock was Avholly or partially 
 given away, it is entirely proper that the courts should 
 assess the stockholders for their unpaid portion of the 
 stock. Under such circumstances the liability of the 
 stockholder is limited to the face value of his stock; but on 
 the other hand, it is equal to the face value of the same. 
 The method which has been practiced so much in the last 
 few years, of giving the common stock as a bonus with the 
 issues of preferred stock, has tended to make the prin- 
 ciple of limited liability a means by which honest creditors 
 have been cheated out of their rights. 
 
 The Charter. 
 
 In choosing a state under which the corporation is 
 formed, the promoters at the same time determine the 
 fundamental legal conditions under which the corpora- 
 tion is to operate. The general corporation act in each 
 state, and in some cases the state constitutions, not only 
 formulate the more important of these conditions, but un- 
 iversally require the incorporators to draw up and adopt a 
 formal instrument under which the incorporators unite to 
 form the corporation. Such an instrument is called the 
 charter or certificate of incorporation, or sometimes the 
 articles of incorporation. 
 
 The charter is therefore usually drawn up by the ori- 
 ginal promoters and at the proper time presented to the 
 proper authorities for their approval. Wherever charters 
 are granted by the special act of some legislature they are 
 likely to be more extensive and more specific. Wherever 
 they are taken out under a general corporation act, they are 
 
MODERN BUSINESS ORGANIZATION 71 
 
 often comparative!}^ brief, since the corporation law out- 
 lines many conditions that would otherwise be provided for 
 in the charter. In all cases they include a brief statement 
 at least on the following points: 
 
 1. Name of the corporation. 
 
 2. Objects or purposes for which it is organized. 
 
 ?y. Amount of capital stock, classes into which it is 
 divided and the rights of each class. 
 
 4. The number of shares into which the capital stock 
 is divided and the par value of each. 
 
 5. The location of its principal office. 
 
 6. The tenn for which it is fonned, either for a period 
 of years or in perpetuity. 
 
 7. The names and post-office addresses of the incorpo- 
 rators. 
 
 Name of the Corporation. 
 
 Tlie choice of a name for the corporation is left to the 
 incorporators with one condition, namely, that they may not 
 select a name already in use by a corporation of the same 
 state already in existence. 
 
 It is desirable to select a name that indicates the nature 
 of the business which the corporation is to undertake, as 
 
 The Motor Car Company, The 
 
 Carbide Company. In some cases the title is chosen to per- 
 petuate the name of some man who has become distinguish- 
 ed for his technical or business ability, as the Westing- 
 house Manufacturing Company. In other cases the name 
 is chosen to continue the name of a partnership which has 
 been converted into a corporation, as the Thompson-Hous- 
 ton Company. In all cases, since the name may become an 
 asset of importance as the reputation of the corporation be- 
 comes established, it is desirable to select one that is short 
 and that is likely to call the attention of those who see it to 
 the business which the corporation is carrying on. 
 
72 MAURICE H. ROBINSON 
 
 The Object or Purpose of The Corporation. 
 
 While the individual and the partnership may in gen- 
 eral undertake anv business not forbidden by law, the cor- 
 poration is required to name the objects for which it is 
 formed, and confine itself rather narrowly to the objects or 
 purposes specified in its charter. Hence it is necessary to 
 state such objects at considerable length. When, however, 
 the business to be undertaken is fairly limited in its char- 
 acter, the object clause may be comparatively brief, as, for 
 example, the following, which is a good illustration of the 
 object clause of a manufacturing company formed for the 
 purpose of making a particular line of machinery: **The 
 purposes for which said corporation is formed are as fol- 
 lows: — 
 
 1. To buy, sell, manufacture and generally deal 
 in all manner of tools, machinery, devices, appli- 
 ances and supplies used in the cooper's trade. 
 
 2. To lease, buy, sell, use and hold all such prop- 
 erty, real or personal, as may be necessary or con- 
 venient in connection with the said business. 
 
 3. To do any or all things set forth in this certi- 
 ficate as objects, purposes, powers or otherwise, to 
 the same extent and as fully as natural persons 
 might do, and in any part of the world."* 
 
 In cases where the business to be conducted is exten- 
 sive, it is desirable to include in the purposes for which 
 the corporation is formed a clause sufficiently broad so that 
 the legitimate activities of the corporation may not be un- 
 duly hampered. For example, the United States Steel 
 Corporation is engaged in practically all kinds of manu- 
 facturing connected with the iron and steel industry. In 
 order that it might be authorized to properly conduct its 
 business, the object clause in its charter contains eleven 
 paragraphs, each of which is a grant of extensive powers 
 in itself. At the end of the last clause, for fear some of its 
 
 ♦Conjmgton: Corporation Management, p. 170. 
 
MODERN BUSINESS ORGANIZATION 73 
 
 proposed activities mi^lit be prevented for lack of author- 
 ity, the following parai^rraph is added: "To do any and all 
 other acts and things and to exercise any and all other 
 powers which a copartnership or natural person could do 
 and exercise and which now or hereafter may be authorized 
 by law."t 
 
 The Capital Stock. 
 
 The provisions in regard to the capital stock may ])e 
 exceedingly brief, or they may be treated at consid- 
 erable length in the charter. In the former case the 
 detailed specifications are reserved for the by-laws. 
 Where a corporation is essentially private in its na- 
 ture, that is, where practically all its stockholders are 
 directly interested in its management, it is proper to 
 make the clause relating to the capital stock brief, 
 specifying merely the amount authorized, the number 
 of shares, and the par value of each. In cases where the 
 corporation is composed of a large number of widely 
 scattered stockholders, the clauses relating to the capital 
 stock should be full and explicit. That of the United 
 States Steel Corporation, for example, not only includes 
 all of the usual provisions, but contains elaborate regula- 
 tions in regard to the payment of dividends, and the distri- 
 bution of the assets in case the corporation is dissolved. 
 The chief object in stating the rights of the stockholders in 
 the charter rather than in the by-law^s is to prevent the ma- 
 jority interests from unduly interfering with the rights 
 of tlie minority. It is usual to provide that the chart(T 
 may be amended only with the consent of a two-thirds or a 
 three-fourths majority, whereas the by-laws can ordinarily 
 be altered by a bare majority and sometimes even by a vote 
 of the directors. Consequently the rights formulated in 
 the charter are likely to be less easily changed and thus 
 more pennanent. 
 
 t Charter of U. S. Steel Corp., Section III. 
 
74 MAURICE H. ROBINSON 
 
 Other Essential Features. 
 
 The location of the principal offices and the names and 
 addresses of the incorporators are required by the statute 
 law quite generally in order that processes may be served 
 and that those responsible for the promotion of the enter- 
 prise may be held accountable to the proper state officers 
 for any breach of the law. The location of the principal 
 office does not necessarily mean the chief operating office. 
 Jersey City, for example, contains the domicile of a large 
 number of New Jersey corporations whose principal places 
 of manufacturing are in Pittsbm'g and Chicago, and the in- 
 corporators may be, and often are, succeeded by the real 
 power behind the throne, as in the case of the United States 
 Shipbuilding Company, as soon as the preliminary stages 
 in the organization are concluded. Some states permit cor- 
 porations to be incorporated in perpetuity; others for a 
 limited term only. In the latter case provision is usually 
 made in the corporation act for a continuation of the cor- 
 porate existence of the enterprise at the expiration of the 
 term for which it is formed, by some formal action on the 
 part of the stockholders. 
 
 In the celebrated case of Dartmouth College v. the 
 State of New Hampshire, decided in 1818, a charter was 
 held to be a contract between the state granting it and the 
 incorporators and their legal sucessors. Hence a charter 
 granted in perpetuity cannot be terminated by action of 
 the state. Accordingly certain charters granted in the 
 early part of the last century, possessing wide powers of 
 doing business, have become exceedingly valuable, and 
 some of these have been obtained and used for purposes 
 quite different from those for which they were originally 
 obtained. As a result of the decision of the Supreme Court 
 in the Dartmouth College case, legislatures of the various 
 states in gi-anting special charters and in their laws for the 
 incorporation of companies under general acts, have quite 
 
MODERN BUSINESS ORGANIZATION 75 
 
 generally provided that such charters may be terminated 
 by the leirislatiires whenever in the opinion of sneh author- 
 ity the public interests seem to make such action desirable. 
 
 In addition to the above clauses which are called the 
 essential features of a corporate charter, it is common in 
 the larger corporations to insert paragraphs regulating, and 
 sometimes limiting, the powers of the directorate. It is, 
 for example, not unusual to specify the number of directors 
 and to provide for their classification into groups, each 
 group serving for a period of years. To regulate the 
 method of electing officers, of filling vacancies, to authorize 
 the appointment of committees and fix their duties, to al- 
 low the directors to fix the working capital and to use the 
 earnings in declaring dividends or for improving the prop- 
 erty, as their judgment directs. To authorize the corpo- 
 ration to hold stock in other corporations, and to require 
 that bonds or mortgages constituting a prior obligation 
 upon any particular class of securities in existence must 
 be approved by a specified majority of the votes of the 
 various classes affected, before such change may go into ef- 
 fect. 
 
 The charter thus formulates the fundamental principles 
 upon which a corporation is organized. In all cases it is, 
 however, subordinate to the corporation law of the state 
 under which the company is incorporated. Its provisions, 
 therefore, seiwe to carry out and extend the provisions of 
 the corporation law rather than to limit or change them. 
 
 The By-Laws. 
 
 The charter is expected to provide for those features in 
 a corporate organization which, by their nature, are in- 
 tended to be fairly permanent. It is therefore formulated 
 at the beginning of the corporate existence of the enter- 
 prise and is ordinarily difficult of amendment. 
 
 The by-laws, on the contrary, are desi.gned to provide 
 the regulations under which the corporation is managed. 
 
76 MAURICE H. ROBINSON 
 
 The charter thus may be compared to the constitution of a 
 state while the by-laws resemble the statute law. The 
 by-laws, therefore, are always subordinate to the charter 
 provisions, and should be considered as a supplement to 
 that document. If the charter is full and explicit upon any 
 point, that topic may be omitted in the by-laws. If the 
 charter fails to make provision for any feature essential 
 to the proper organization and conduct of the corporation, 
 such feature should be covered by the by-laws. In general, 
 the by-laws provide fairly specific rules and regulations in 
 regard to the following subjects: 
 
 1. Stock. 
 
 2. The stockholders. 
 
 3. The directors. 
 
 4. The officers. 
 
 5. The dividends and finances. 
 
 6. The amendments. 
 
 1. The Stock. — It is usual to provide in the by-laws 
 that certificates of stock shall be issued to the stockholders 
 and to require that such documents be signed by the presi- 
 dent and treasurer, and sealed by the secretary with the 
 corporate seal; that a complete record of the issue of such 
 certificates shall be kept and that transfers of stock shall 
 be made only on the books of the company; that old certi- 
 ficates must be surrendered and cancelled before new ones 
 are issued to take their place. It is also usual to require 
 the stock book to be closed for a short period, for example, 
 twenty days, before the general elections and for a shorter 
 period before dividend days. It is also desirable to make 
 provisions concerning treasury stock and usually directors 
 are forbidden to vote or pay dividends on such shares. 
 The object of the stock provisions in the by-laws is to en- 
 able the management and stockholders to know who holds 
 the various shares of stock, in order that notices of meet- 
 ings may be sent, or in order that proposed plans of corpo- 
 rate policy may be presented to them before the meetings 
 
MODERN BUSINESS ORGANIZATION 77 
 
 are called; to prevent I'radiilent issue of certififates and to 
 lessen the speculative purchases of stock just before divi- 
 dend days; and finally, to make it difficult to control the 
 election of directors by purchasing stock immediately be- 
 fore election, holding it for purposes of voting upon it dur- 
 ing the election, and, when the election is over, selling the 
 same. 
 
 2. The Stockholders. — The time and place of the an- 
 nual meeting is always provided for in the by-laws, and 
 it is also customary to specify that a notice of such meet- 
 ing shall be sent by the secretary to each member a suffi- 
 cient tune in advance to give all stockholders an oppor- 
 tunity to attend the meeting if they so desire. The elec- 
 tion of directors and the reports of officers are usually re- 
 quired at the annual meeting. It is usual by statute law 
 to allow voting by proxy; wherever such is not the case 
 it is common to authorize this method of voting in the by- 
 laws. Special meetings of the stockholders are also pro- 
 vided for under this section. Such meetings may be called 
 ordinarily either by a resolution of the board of direct- 
 ors, or on request of a representative number of the stock- 
 holders. In addition to this the number required for a 
 quorum is stated, and the order of business which is fol- 
 lowed in the various meetings is outlined. 
 
 3. The Directors. — The coii^oration law of all the states 
 requires that the business of the corporation shall be man- 
 aged by a board of directors. In the by-laws the number of 
 such directors is fixed, if not already provided for in the 
 charter, and in addition, their qualifications, method of 
 election, terai of office, and method of filling vacancies are 
 stated. It is also customarj' to require regular meetings of 
 the board and to pro^-ide for special meetings whenever 
 the business of the coi^joration requires. In this section 
 the quonun is stated and the method of electing officers is 
 given in detail. In the larger corporations the board of 
 directoi-s is authorized to appoint various committees to 
 
78 MAURICE H. ROBINSON 
 
 take charge of the business of the board while the board is 
 not in session. For example, the United States Steel Cor- 
 poration has two such standing committees — the execu- 
 tive committee and the finance committee. These com- 
 mittees prepare plans for the consideration of the full 
 board, and oversee the execution of such plans after they 
 are adopted. The committee system is an essential fea- 
 ture of corporate organization for those corporations hav- 
 ing a large number of directors and for those where the 
 directors live at a considerable distance from each other. 
 
 4. The Officers. — The corporation act of the various 
 states generally requires that the following officers shall 
 be elected, namely, a president, a secretary and a treasur- 
 er. It is usual to provide that such officers may be chosen 
 by the directors or by the stockliolders, as the by-laws di- 
 rect. The president must ordinarily be a director; the other 
 officers may or may not be directors. The corporation act 
 also provides that such other officers may be chosen as the 
 by-laws specify. Consequently it is necessary to provide 
 in the by-laws for the complete official organization of the 
 corporation, to determine the method by which the officers 
 shall be elected, and to give an outline at least of the 
 duties of the official staff. 
 
 In addition to the officers which are required by law, it 
 is common in the larger corporations to appoint one or 
 more vice-presidents, a general manager, and a chief coun- 
 sel. Where one vice-president only is appointed, such of- 
 ficer generally acts as an assistant to the president. Where 
 several are appointed, it is common to divide the work of 
 the corporation into departments and give each vice-presi- 
 dent general supervision over one of these. The president 
 in such cases becomes the general supervising officer, but 
 without specific duties in any department. The president 
 as the name signifies is ordinarily the chief officer of both 
 in the by-laws are to preside at aU the meetings of both 
 the stockholders and the directors. His duties as outlined 
 
MODERN BUSINESS ORGANIZATION 79 
 
 these organizations, when he is able to be present. lie also 
 is generally authorized to sign all stock certificates, all im- 
 portant contracts, all deeds, and such other papers as are 
 deemed of sufficient importance to need the approval of 
 the chief executive. It is customaiy also to provide in the 
 by-laws that he shall make a complete annual report to the 
 directors and present the same at the annual meeting of the 
 stockholders. He is usually made, ex-officio, a member of 
 all important committees, and is ordinarily the chief execu- 
 tive officer for the entire corporation. 
 
 Some of the larger corporations have introduced a new 
 officer called the chaiiman of the board, and assign to him 
 a portion of the president's duties. The chairman of the 
 board presides at the meetings of the boards of directors, 
 while the president retains his former place as presiding of- 
 ficer at the stockholders' meetings. The chairman thus 
 takes on the more important and more dignified duties of 
 the president, and as a matter of fact is usually a former 
 president who has been relieved of certain active duties of 
 his office and becomes a somewhat ornamental head of the 
 corporation, the president meanwhile retaining the more 
 active duties of the president's office. 
 
 The secretaiy is one of the necessary officers of a 
 corporation, so necessary in fact that the corporation laws 
 of the several states require the appointment of such an 
 officer and specify the more important duties that he is to 
 perfoiTn. The New Jersey law, for example, provides that 
 *'the secretaiy shall be swoni to the faithful discharge of 
 his duty, he shall record all the votes of the corporation and 
 directors in a book to be kept for that purpose, and perform 
 such other duties as shall be assigned to him." In the by- 
 laws of the United States Steel Corporation, other duties 
 assigned to the secretary' are as follows: He is required 
 to keep the minutes of the meetings of the board of direct- 
 ors and of the stockholders; to serve all notices for the com- 
 pany; to sign with the president all contracts authorized by 
 
80 MAURICE H. ROBINSON 
 
 the board of directors or the finance committee and to affix 
 the seal of the company to the same ; to have charge of the 
 certificate books and transfer books, the stock ledgers, and 
 such other books as the directors or the finance committee 
 may direct, and keep them open for inspection of the proper 
 officers during business hours; and in general to perform 
 the duties incident to his office, subject to the control of 
 the directors and the finance committee. In the larger 
 companies the secretary has one or more assistants whose 
 duties are assigned in the by-laws or determined by order 
 of the board of directors. 
 
 A third officer generally required by the corporation 
 act in all of the states is the treasurer. In the New Jersey 
 code the only provision made in regard to this officer is that 
 a treasurer shall be chosen and that he shall give a bond 
 for the faithful discharge of his duties in such sum and with 
 such surety or sureties as the by-laws may require. The 
 by-laws must then provide for the treasurer's bond, and 
 in addition it is usual to give an outline of his more impor- 
 tant duties. His chief function of course is to have over- 
 sight of all the moneys and securities belonging to the cor- 
 poration. He keeps his own books and, in some eases, he 
 has entire charge of the books of the company. Ordinarily 
 certain papers and documents of an important financial 
 character require his signature, such, for example, as stock 
 certificates, bills of exchange, promissory notes, receipts, 
 vouchers for payments made to the company; he also may 
 be authorized to sign checks, sometimes alone and 
 sometimes in conjunction with another officer desig- 
 nated for this purpose. In all of his duties it is usual to 
 prescribe in the by-laws that he shall be subject to the con- 
 trol of the board of directors, and shall keep his books and 
 accounts open to the inspection of those authorized to see 
 the same during business hours. Like the secretary in the 
 larger corporations, he has one or more assistant treasurers 
 acting under his immediate direction. 
 
MODERN BUSINESS ORGANIZATION 81 
 
 Such other officers are provided for in the by-laws as the 
 conditions of each corporation seem to wari-niit. Tlio two 
 most important of such arc the general counsel and the 
 auditor. The general counsel is, as the name indicates, the 
 chief legal officer of the corporation. All matters concern- 
 ing the laws under which the corporation is organized and 
 conducted are, by the by-laws, entrusted to his immediate 
 care. In the case of railways and certain large business 
 corporations the chief counsel is assisted by a staff of as- 
 sistant solicitors. 
 
 The auditor is one of those indispensable officers whose 
 real value has only recently been recognized in business 
 organization and management. Hence, until recently, all 
 the work of the auditor has been subdivided among the 
 secretary, the treasurer, and the head bookkeeper. Within 
 the last quarter of a century, however, the complexity of 
 the modem business organizations has made necessary not 
 only more elaborate accounts, but also their concentration 
 in a general office especially created for that purpose, con- 
 trolling and unifying all of the accounts. Consequently in 
 many of the more complex business organizations the audi- 
 tor is provided for in the by-laws and his duties are there 
 specified. Wherever such an office exists, the holder of it 
 is authorized in the by-laws to take charge of all the ac- 
 counts of the company, subject of course to the general 
 directions of the board. He has, of course, a staff of assist- 
 ants, whose duties are arranged by the directors, sul)ject 
 to his personal direction. 
 
 In the smaller corporations, the president, by vii'tue of 
 his office, usually occupies the position of general manager. 
 In the. medium sized ones, it is common to delegate a 
 portion of his duties to the general manager. In such cases 
 the by-laws give the latter a certain indeiM^ndence of posi- 
 tion by specifying that he shall, under the supervision of 
 the board of directors and the president, have charge of 
 managing the active business operations of the corporation. 
 
 B— II— € 
 
82 MAURICE H. ROBINSON 
 
 In tlie larger companies, however, the duties of the gen- 
 eral manager, as previously stated, are usually divided up 
 and entrusted to several officers who are generally desig- 
 nated as vice-presidents in charge of the various depart- 
 ments created by order of the board of directors. 
 
 5. Dividends and Finance. — The distinguishing char- 
 acteristic of the business corporation as compared "\;\ith a 
 municipal or a social corporation, is that it exists to earn 
 profits and to declare the same in the form of dividends. 
 It is however possible to declare dividends out of the cap- 
 ital assets and thus unpair the future earning capacity of 
 the corporation. On the other hand, it is possible to de- 
 clare no dividends at all, where a corporation is earning a 
 reasonable rate of profit, b}'' keeping the surplus earnings 
 and reinvesting the same in the property or in other in- 
 dustrial undertakings. Consequently it is considered de- 
 sirable to formulate a di^ddend policy for the organization 
 in some of the formal documents connected with its organi- 
 zation. Foraierly the states in their corporation laws ex- 
 ercised very little supervision over the matter of dividends 
 of a corporation. OA^dng however to the development of 
 certain evils, such, for example, as stock speculation by the 
 directors or wasting the assets for the purpose of defraud- 
 ing the creditors, it is common to provide in the general cor- 
 poration act that dividends may be paid only out of the 
 earnings, and that the directors shall be jointly and several- 
 ly liable for dividends paid out of the capital assets. On 
 the other hand, some states provide that, unless otherwise 
 authorized by the majority of the stockholders in the ar- 
 ticles of incorporation or in the by-laws, the directors must 
 annually declare in dividends the surplus profits over and 
 above the working capital fixed by vote of the stockholders. 
 
 It is therefore required in some cases and desirable in 
 all, that a dividend policy within the limits fixed by statute 
 law shall be definitely formulated and stated in the by- 
 laws if not in the charter. It is then customary to specify 
 
MODERN BUSINESS ORGANIZATION 83 
 
 that dividends shall be paid only out of the surplus profits 
 of the corporation. It is also common to permit the di- 
 rectors to fix the amount of the working capital and in 
 some cases to determine whether the earnings shall 
 be declared in dividends or used to improve the property. 
 In the ordinary meaning of the word, dividends include 
 payments in money only. The so-called stock dividends 
 are in reality an increase of the capital stock distributed to 
 the stockholders pro rata either as a gift or at less than 
 their real value. Furthei-more, it is customary to provide 
 that the dividends be declared annually or semi-annually, 
 rather than at times chosen in any haphazard way. 
 
 However, it is difficult to arrange for all of the above 
 matters in advance since the rate of earnings must always 
 be somewhat uncertain and consequently any such regula- 
 tion in the by-laws is likely to be an expression of policy 
 rather than a fixed rule. 
 
 The amount of working capital or reserve is ordinarily 
 fixed by the dii-ectors. Under the New Jersey law, how- 
 ever, express authority must be granted them in the charter 
 or by-laws in order that this policy may be legally followed. 
 By varying the amount of the working capital, it will be 
 noticed, the surplus available for dividends can be controll- 
 ed at will. Hence the requirement in the by-laws of some 
 companies that the working capital shall be fixe'd at a 
 certain percentage of the total assets. Under such cir- 
 cumstances it becomes necessary to declare the remainder 
 of the surplus earnings in dividends at regular periods. 
 
 While ordinarily the financial affairs of a corporation 
 are entirely subject to the control of the board, it is com- 
 mon to specify that the cash of the company be kept in 
 some conseiwative bank and that all pa^Tnents on behalf of 
 the company be made by check, duly signed by the proper 
 officers, usually the president and the secretary. It is also 
 common to provide in this fonnal way that all debts con- 
 tracted above a certain specified simi shall be duly author- 
 
84 MAURICE H. ROBINSON 
 
 ized by a majority vote of the board of directors. The ob- 
 ject of this is to hold the directors responsible to the stock- 
 holders whenever they unduly increase the obligations of 
 the company. 
 
 6. Amendments to the By-Laws. — The by-laws should 
 contain a clause providing for their own amendment under 
 such conditions that the will of the corporation, expressed 
 through its majority, is likely to be effected. In Illinois, 
 where the statute provides that the by-laws shall be made 
 and amended by the directors, the amendment clause in 
 well-managed corporations contains the following provi- 
 sions : That proper notice of a proposed amendment must 
 be given by the officers, and that the changes proposed shall 
 go into effect only when considered by the board at some 
 regular meeting and approved by a specified majority. In 
 states like New Jersey, where the ultimate control over the 
 by-laws is entrusted to the stockholders, or where this 
 power may by the charter be given to the directors subject 
 to final alteration by the stockholders, the amendment 
 clause should state the conditions under which the directors 
 may exercise their power of amendment and the methods by 
 which the stockholders may exercise their superior right to 
 alter or veto such acts. Where the right is retained by the 
 stockholders, the method of amendment should be given at 
 length, and should provide for full notice of the amend- 
 ments and for the formal approval of at least a majority of 
 the stockholders at a regular meeting, or a meeting called 
 for the purpose of considering the amendment, in order 
 that such amendments be made a part of the rules under 
 which the corporation operates. 
 
 IV. INTERNAL ORGANIZATION OF 
 THE CORPORATION. 
 
 From the proprietary point of view the corporation 
 under usual conditions is made up of two grougs, each hav- 
 
MODERN BUSINESS ORGANIZATION 85 
 
 ing distinct rights, privileges and liabilities. These two 
 groups are the bondholders and the stockholders. 
 
 The Bondholders. 
 
 The rights of the bondholders in a corporate organiza- 
 tion are fixed partly by statute law, and partly by contract 
 between the bondholders and the stockholders representing 
 the corporation. In the simpler cases, the bonds issued are 
 all of one class, and consequently the bondholders enjoy 
 equal rights and privileges. As a result, however, of the 
 rapid growth of corporate enterprises, those companies 
 which originally started with a simple bond issue usually 
 have found it desirable, in the course of time, to issue addi- 
 tional bonds. Instead of paying up the outstanding obliga- 
 tions and issuing new ones in their places, it is found more 
 convenient to allow the bonds already issued to remain 
 until the expiration of their period, and add a second class 
 of bonds subordinate to the foraier issues both in respect to 
 the right to interest and to the assets. This process is 
 often continued until a corporation may have many differ- 
 ent classes of bonds, each having different rights and dif- 
 ferent privileges. 
 
 In general, without regard to the different classes of 
 bonds, the holders of the same have two fundamental rights: 
 First, to receive a fixed rate of interest during the period 
 which the bond runs; and second, to receive the face value 
 of the bond, or the face value plus a premium under cer- 
 tain conditions, when the term of the bond ends or tlif cor- 
 poration is dissolved. In addition the l)ondholders have 
 certain privileges through which they are enabled to en- 
 force their property rights. First, to have the business 
 managed in their interest if, for any reason, the rate of in- 
 terest specified in the bond fails to be paid; and second, in 
 common with others, to bid for the property u]")on which the 
 bonds are secured in cases where, owing to the failure to 
 pay interest charges, the corporation becomes bankrupt. 
 
86 MAURICE H. ROBINSON 
 
 Third, to reorganize themselves into a new corporation and 
 take entire control of the property and its management 
 where they are successful in bidding the property in at the 
 bankrupt sale. 
 
 Bondholders are thus proprietors who have relinquished 
 the privilege of actively directing the business in which 
 they are interested in exchange for a first claim upon the 
 earnings during operation, and upon the assets in case of 
 dissolution. Their contingent rights in the management 
 of the enterprise appear in the true light whenever a cor- 
 poration is, for any reason, unable to pay the specified rate 
 of interest. The immediate result of the failure to pay 
 the specified interest is, under normal conditions, the ap- 
 pointment of a receiver by the courts to represent the in- 
 terests of the bondholders and to manage the property for 
 them. If the receivership is unusually successful, the bus- 
 iness may be turned over to the stockholders as soon as it 
 is able to make up the deferred interest and to continue the 
 stipulated rate for the immediate future. In ordinary 
 cases, however, a corporate enterprise is reorganized or 
 sold. In the first case, the bondholders become stockhold- 
 ers with preferred rights; in the latter case, they usually 
 purchase the business, reorganize it themselves, and thus 
 become the only stockholders in the new enterprise. 
 
 Where there are several classes of bonds, the respective 
 rights of each class are fixed by the terms under which they 
 are issued and follow in regular gradations from the high- 
 est to the lowest. Those in the lowest grade, however, in 
 practically all cases, precede the highest grade stocks in the 
 rights to the earnings and assets, and usually all classes, ex- 
 cept the very lowest, have no direct right to participate in 
 the management except as a result of actual bankruptcy 
 and the consequent reorganization. 
 
 Thus stockholders in a well-organized corporation have 
 a double motive to limit the amount of the bonds to a sum 
 upon which they are able to pay interest during term of 
 
MODERN BUSINESS ORGANIZATION 87 
 
 the bonds and tlieir face at expiration: First, as stated in 
 a previous section, because the larger the amount of bond 
 issue tlie hii^hcr the rate of interest at wliich they can be 
 sold in the open market, and second, because in addition 
 to paying a high rate of interest the stockholders are in 
 danger of losing their o\\ti rights both in the assets and 
 the future earnings whenever the business for any reason 
 is subjected to unfavorable conditions. 
 
 The Stockholders. 
 
 Tlie stockholders have certain rights which are exer- 
 cised only through group action, and are specified in detail 
 in the general corporation act, the charter and the by-laws. 
 These rights are, first, to amend and alter the charter and 
 the by-laws; second, to dissolve the corporation; third, to 
 elect the directors and in some cases to supervise the man- 
 agement of the corporation through control over the by- 
 laws; and fourth, to have control over the disposition of the 
 permanent assets of the corporation. 
 
 The charter, being the organic law under which the 
 stockholders are luiited, is, almost universally, amended 
 or changed only by their formal approval, and usually by a 
 two-thirds majority. Since by changing the charter the 
 Yevy nature and operations of a corporation may be entire- 
 ly altered, the statute law of the various states has very 
 properly provided that proposals for such changes must be 
 offered some time in advance of their consideration, due 
 notice of such proposals must be given and the amendments 
 approved by a large majority of stockholders before they 
 go into legal effect. Tlie same is true to a somewhat more 
 marked extent in regard to the dissolution of the corpora- 
 tion. However, successful corporations are seldom dis- 
 solved, and unsuccessful ones are often permitted to lapse 
 through failure to pay the annual license fees and taxes. 
 
 In all cases the direct control over the corporation is 
 exercised by the directorate. Consequently the method bj; 
 
88 MAURICE H. ROBINSON 
 
 which the directors are elected is ordinarily stated at length 
 in the general corporation act. In some cases, however, 
 the regulations concerning the election of directors are left 
 for the charter and the by-laws. In some instances, the di- 
 rectors are elected as a body annually; in others, they are 
 elected in classes, each class serving for a period of years. 
 In either case, since the stockholders have the right to elect, 
 it is possible for them to outline the policy which they wish 
 to have followed and secure a pledge from the success- 
 ful candidates for the directorate in favor of such policy. 
 
 AVhere the directors are elected in classes, it always re- 
 quires at least two years for the stockholders to gain con- 
 trol over a directorate which fails to represent them. 
 However, whether the directors are elected annually or for 
 a period of years, they are by the law of the various states 
 peiTnitted to act upon their ovm. judgment in the manage- 
 ment of the corporate business. In a few cases only, stock- 
 holders have a right to supervise or approve the formal 
 action of the board of directors. The most important of 
 these are : First, the permanent assets of a corporation may 
 ordinarilybe sold only on the approval of a vote of the stock- 
 holders; and second, no mortgage or other long term obliga- 
 tion may ordinarily be authorized by the directors mthout 
 their approval. The principle, as above stated, holds true 
 ordinarily for each class of stockholders. Thus whenever 
 a corporation is created with one class of stock only, no 
 stock with superior rights may be issued except with the 
 approval of the class already in existence; and wherever 
 there are two classes of stock provided for, no third class 
 having superior rights may be created by the board of di- 
 rectors without the formal consent of both the previous 
 classes. 
 
 The control over the management of a corporation en- 
 trusted to the stockholders, namely, the right to elect di- 
 rectors, to approve the sale of permanent assets, and to au- 
 thorize the issue of superior obligations, is, as will be no- 
 ticed, a right that belongs to the majority of the stock- 
 
MODERN BUSINESS ORGANIZATION fiP 
 
 holders expressed by a vote in a formal meeting of the 
 corporation. Where the majority of tlio stook is held by 
 a small "roup of men, the minority, wliich under snch cir- 
 enmstanees is likely to be represented by a considerable 
 nnmlier of small stockholders, has no recourse apjainst such 
 majority rule except in cases of actual fraud or dishonesty. 
 
 As individuals, stockholders have additional rights, 
 some of which depend largely upon the approval of the 
 majority by formal action for their proper protection. The 
 more important of these rights are, first, to participate in 
 all stockholders' meetings; second, to receive certain kinds 
 of information, and within specified limitations to inspect 
 the books and accounts of the company; third, to share in 
 the dividends declared during the life of the corporation, 
 and in the assets at its dissolution. 
 
 1. Each stockholder has the right to attend all regular 
 and special meetings of the corporation and to have good 
 and sufficient notice of the same, including the time of the 
 meeting and the place where it is to be held. He is also 
 entitled to have infonnation in regard to the character of 
 the meeting and the business that is to be presented for his 
 consideration. In some cases such notice may be given by 
 advertisement in some newspaper designated by law, but 
 usually, even where an advertisement is required, a written 
 or printed notice must be mailed to the address of each 
 stockholder. 
 
 In the second place, each stockholder has the right to 
 take part in the discussions at the various meetings, under 
 the ordinary rules of parliamentary practice. lie may 
 therefore ask for infonnation upon the business policy and 
 practice of the management, and offer resolutions for the 
 consideration of the stockholdei-s, directing the manage- 
 ment to take specific action where such action is within 
 the scope of the stockholders' authority, and advising the 
 officers in other cases. 
 
 In the third place, each stockholder has the right, gen- 
 
90 MAURICE H. ROBINSON 
 
 erally under statute law, to be represented by some per- 
 son chosen to act in his stead when for any reason it is in- 
 convenient or impracticable for him to attend in person. 
 The instrument by which this right is conferred is the 
 proxy or, more formally, a special power of attorney. Such 
 right may be conferred for action upon a particular pro- 
 position or for a particular meeting, or for all meetings 
 mthin the limit of time sanctioned by the law of the state. 
 In any of these cases the holder of the proxy may be author- 
 ized to vote upon a certain proposition in a specific way, 
 or he may be authorized to act upon his own judgment on 
 any of the questions that legitimately come before the 
 stockholders for their approval or rejection. Under any 
 circumstances the stockholder may revoke the proxy which 
 he has granted whenever he chooses, and in many states 
 the life of all proxies is limited by law to a term of years. 
 
 The proxy has its own peculiar advantages and disad- 
 vantages, which should be noticed at this point. It is ob- 
 vious of course that it permits the stockholder to be repre- 
 sented without actually being present in person. This 
 makes it practicable for Englishmen to own shares of stock 
 in the South African diamond mines, and for residents of 
 the eastern states to invest their surplus capital in develop- 
 ing the industries of the western states. This is especially 
 true of the small investor who can take up only a few shares 
 in a corporation. To attend the various meetings of the 
 stockholders would entail an expense greater than the 
 total income which he derives from his shares, and he would 
 hardly care to invest in the stock of companies where he 
 has legal liabilities as a shareholder, but no practical method 
 of exercising his legal right of participating in the meet- 
 ings. 
 
 The proxy, then, gives the small stockholder a cheap 
 method of representation at all the meetings of the corpora- 
 tion. Like all other good things, however, it is liable to 
 abuse. This may arise either as a result of misrepresenta- 
 
MODERN BUSINESS ORGANIZATION 91 
 
 tion by the proxy holder or tlirongli granting tlic right to 
 nnsiiitable representatives. In the first case, that of mis- 
 representation, the normal corrective would seem to lie m 
 granting a specific proxy only. Snch treatment of the evil 
 of misrepresentation is, however, impracticable. In the 
 first place, many matters come up for action at the various 
 meetings that are imforseen, and in the second place intel- 
 ligent action is often possible only after a full discussion 
 of the proposition. To tie up the delegates by specific 
 proxies nullifies all the good that may come from full and 
 free discussion on the part of the persons at the meeting. 
 Through the use of the proxy it is possible to hold a meet- 
 ing of the stockholders of the largest corporation with only 
 one person present where, for any reason, such person 
 holds all, or a majority of the proxies. It will be readily 
 seen that in order to control the management the simplest 
 Avay is to secure by solicitation, previous to the meeting, 
 proxies representing a majority of the stock outstanding. 
 Sometimes the struggle for proxies becomes so fierce and 
 bitter as to resemble a civil war, and to result in the over- 
 throw of a management of long standing, as in the case of 
 the Fish-IIarriman contest for the control of the Illinois 
 Central Railroad, in 1907. 
 
 Wliere a majority of the proxies are in the control of 
 one person, or in the control of a certain faction represent- 
 ing the board of directors, the individual stockholders at 
 the meeting, while able to take part in the discussion, are, 
 it will be seen, unable to influence the vote of the corpora- 
 tion, since such vote is entirely controlled by the person or 
 the group holding the majority of the proxies. 
 
 In voting at stockholders' meetings the general rule is 
 that each share of stock has one vote. As noticed above, 
 however, it is sometimes provided, as in the charter of the 
 Rock Island Pompany, that the shareholders of the pre- 
 ferred stock shall, in the elertion of the directors, vote inde- 
 pendently, and may elect nine of the fifteen directors. The 
 
dB MAURICE H. ROBINSON 
 
 common stockholders elect the remainder. Such a provi- 
 sion virtually gives the control of the corporation into the 
 hands of the holders of the preferred stock. 
 
 The second variation from the usual method is found in 
 the use of the principle of cumulative voting. In some 
 states, as, for example, in Illinois, this method is authorized, 
 by statute law, and is therefore a right that belongs to the 
 individual stockholder. Under the system of cumulative 
 voting each stockholder may cast all his votes for one di- 
 rector, or distribute his votes among several, as he pleases. 
 The method thus insures, under any and all circumstances, 
 that a small group of stockholders, by acting in concert, 
 may have at least one representative on the board of di- 
 rectors. It is thus one of the most effective provisions 
 against the evils of majority rule. 
 
 2. In a partnership each of the partners participates 
 in the management and therefore has both the opportu- 
 nity and the right to know all the details of the company's 
 business. The corporation is, however, both historically 
 and logically, a highly developed form of partnership in 
 which the members entrust the active management to an 
 elected board of directors. As a result of its origin the 
 stockholders formerly possessed the same right to complete 
 information in regard to the corporation and its internal 
 affairs as was enjoyed by the partners in a firm. Each 
 stockholder was therefore permitted to go into the office or 
 to the works at his pleasure. It was found as a result of ex- 
 perience that this privilege was particularly open to abuse. 
 In a partnership each partner is likely to devote his entire 
 time and energy to a single business enterprise. The indi- 
 vidual stockholder on the other hand is more likely to be 
 interested in several enterprises. He may even become a 
 competitor of himself and thus desire information in regard 
 to business conditions and business policy of the corpora- 
 tions in which he is the least interested for the purpose of 
 using such information to help those in which he is more 
 
MODERN BUSINESS ORGANIZATION 93 
 
 interested. lu many instances competitors have often pur- 
 chased a share of stock in some rival coi-poration in order to 
 gain information Avhich, under ordinary circumstances, 
 would be entirely beyond their power to gain. 
 
 This condition has led legislatures and courts to adopt 
 quite a different policy from that originally pursued. In 
 general the stockholder is pcnnitted to examine the stock 
 and transfer books by applying at the principal office, dur- 
 ing office hours. However, where there is good reason to 
 believe that the party asking for such information intends 
 to make improper use of it, the courts will not aid him by 
 issuing the proper writ. As to the business books of the 
 corporation, the stockholder has no right of inspection at 
 all. For example, he cannot legally enforce a demand for 
 Infoi-mation in regard to the purchases or sales of a com- 
 pany, or in regard to its contracts, and the like. He is, 
 however, usually able to secure annual reports summar- 
 izing the income for the year and showing the financial con- 
 dition of the corporation at its termination. But such 
 rights may often be relinquished by the stockholders, for 
 the time being, by the insertion of clauses authorizing such 
 action in the charter or the by-laws. As a matter of fact, 
 owing to the insistent demand of most investors for infor- 
 mation in regard to the financial condition of the coi^ora- 
 tions in which they hold stock, corporations appealing to 
 the general public for funds cannot successfully for any 
 length of time adopt a secretive business policy. Such in- 
 stitutions as the Standard Oil Company and the American 
 Sugar Refining Company are apparently marked excep- 
 tions to this general rule, having ])eeu so successful under 
 the policy of giving no information to anyone that their 
 stockholders have made no attempt to secure even adequate 
 annual reports. 
 
 With railroads and public sen'ice corporations the case 
 is entirely different. By the adoption of the Interstate 
 Commerce Law in 1887, railways doing interstate business 
 
94 MAURICE H. ROBINSON 
 
 are obliged to fumisli montlily and annual statements to 
 the Commission, and sueh reports are published annually 
 in a volume called Statistics of Railways in the United 
 States. The states quite generally require similar reports 
 from local railways and other public service corporations. 
 Some of this information is, to be sure, never published, and 
 some of it is worthless even after being printed and distrib- 
 uted; but on the whole the tendency is toward better and 
 more fully summarized reports for the benefit of the indi- 
 vidual stockholder, so that he places less and less depend- 
 ence upon his own direct examination of the company's 
 books. This is a distinct gain for legitimate business en- 
 terprises, since such infonnation is more trustworthy, and 
 in addition cannot be used for the purpose of injuring the 
 business of the corporation which is giving the informa- 
 tion. 
 
 3. A corporation earning a regular income upon its in- 
 vestment may use its surplus earnings in either one of the 
 two following ways; First, it may improve its plant and 
 equipment or purchase other property; second, it may de- 
 clare such earnings to the stockholders in the form of divi- 
 dends. In the first case, the capital assets increase in value 
 and such increase is represented on the company's books as 
 a surplus, as shown in the following balance sheet: 
 
 BALANCE SHEET. CORPORATION F. 
 
 Assets. Liabilities. 
 
 Plant and machinery $10,000,000 Bonds $5,000,000 
 
 Improvements 5,000,000 Stock 5,000,000 
 
 Surplus 5,000,000 
 
 Total i. $15,000,000 $15,000,000 
 
 Let us assume that the corporation has been operating 
 for five years, and during this period has been earning one 
 million dollars annually, but has used this income to im- 
 prove its plant and machinery. Having adopted this 
 policy, it has been unable to pay dividends in the ordinary 
 sense of the word. The stock which was originally worth 
 its face value is now, provided the imj)rovements were de- 
 
MODERN BUSINESS ORGANIZATION 95 
 
 sirahle in themselves, worth twice its face vahie or J^200 for 
 each $100 share. Supposing at this point that no further 
 improvements are desirable and that the investments out 
 of profits are beginning to show results in increased earning 
 power, the corporation, having been able to earn one mil- 
 lion dollars annually on the ten million invested, will, under 
 the assumed conditions, earn one and one-half million an- 
 nually on its fifteen million investment. Assuming a five 
 per cent rate of interest on the bonds, the stock was earn- 
 ing $750,000 annually before the improvements were begun, 
 or a rate of fifteen per cent upon the capital stock; and 
 after the improvements were completed it would earn $1,- 
 250,000 annually, or twenty-five per cent on the stock. 
 The directors may, therefore, begin dividends, provided 
 they do not deem it desirable to increase the cash surplus, 
 and declare such dividends on existing stock at the full 
 earning rate, namely twenty-five per cent. This policy is, 
 however, likely to cause public criticism and, in the case 
 uf public service corporations, political interference with 
 the rates or with the service rendered. 
 
 They may, therefore, adopt a different policy. Since 
 each share having a par value of $100 represents assets 
 worth $200, the total stock of the company may, by an 
 amendment to the charter, be doubled in amount and one 
 share of new stock issued as a gift to each holder of one 
 share of the former issue, Tlie changes caused by this pol- 
 icy are shown in the following balance sheet: — 
 
 BALANCE SHEET. CORPORATION G. 
 
 Assets. Liabilities. 
 
 Plant and machinery with Bonds $5,000,000 
 
 improvements $15,000,000 Stock 10,000,000 
 
 Total $15,000,000 $15,000,000 
 
 The process of converting the existing surplus into ad- 
 ditional stock, as described above, is called declaring a 
 stock dividend or, in the expressive language of Wall Street, 
 * * cutting a melon. ' ' Wherever a real surplus exists and the 
 
m MAURICE H. ROBINSON 
 
 stock representing it is issued pro rata to all the present 
 stockholders, no valid criticism against this method of de- 
 claring a dividend can be presented. Such a surplus can be 
 created only by withholding the earnings and those who 
 have held their stock during the waiting period are entitled, 
 upon both moral and economic grounds, to their share of the 
 new stock. In some cases, however, the directors instead 
 of giving new stock as a bonus to the existing stockholders, 
 either by choice or as a result of statute law, require that 
 all new issues shall be sold for cash and offer such shares 
 to a public or private market. Let us suppose that such 
 shares are offered to the existing stockholders, pro rata, at 
 $75 per share. In this case the stock is offered to a private 
 market. Those stockholders who have funds available for 
 investment are in a position to take up their quota and thus 
 make $25 per share by purchasing the new stock at less 
 than its real value. On the contrary, those who have no 
 funds available for investment at the time the new stock is 
 offered, will be unable to take advantage of this opportu- 
 nity. In such cases the stockholder's rights to subscription 
 become of value when a corporation, either by force of law 
 or through the application of the principles of equity, pro- 
 vides for such contingencies, and the latter class of share- 
 holders are able to sell their rights for cash and thus realize 
 upon their surplus in this way. 
 
 Until the economic right of every stockholder to partic- 
 ipate in the distribution of dividends through the issue of 
 additional stock shall be fully guaranteed by statute law in 
 every state, there will be opportunity to withhold earnings 
 for a period of years, create a surplus, issue additional stock 
 to represent the same, and then give those shareholders 
 having surplus capital the chance, which they ordinarily do 
 not hesitate to use, of subscribing for stock which was not 
 taken up by the other shareholders. Unfortunately this 
 method of defrauding certain members of the corporation 
 for the benefit of the rest is of much less importance than 
 
MODERN BUSINESS ORGANIZATION 97 
 
 fonnerly owing partly to the protection offered by ohanLros 
 in the statute law of many states, and partly to the faet that 
 stockholders as a result of experience take the precaution to 
 protect themselves when new issues of this kind are au- 
 thorized. Where such stock is offered to the public mar- 
 ket, those shareholders in closest touch with the financial 
 situation will have a decided advantage in taking up the 
 new issues. At the present time, however, such stock must 
 ordinarily be offered first to the present shareholders rather 
 than to the public market. 
 
 In the second case, the capital assets increase regularly 
 during each year, but at the end of such period are reduced 
 to their foiTner status by the conversion of the surplus into 
 dividends. The changes which the assets and liabilities of 
 a corporation undergo as a result of this process, are shown 
 by the following series of balance sheets: 
 
 BALANCE SHEET. CORPORATION H. 
 
 (a) At the Beginning of the Year. 
 
 Assets. Liabilities. 
 
 Plant and machinery $10,000,000 Bonds $ .^.nnn.nno 
 
 Stock 5.000,000 
 
 Total $10,000,000 $10,000,000 
 
 (b) At the End of the Year. 
 
 Assets. Liabilities. 
 
 Plant and machinery $10,000,000 Bonds $ 5,000,000 
 
 Cash 1.000,000 Stock 5.000,000 
 
 Surplus 1.000.000 
 
 Total $11,000,000 $11,000,000 
 
 (c) .•\fter the Dividend is Declared. 
 
 Assets. Liabilities. 
 
 Plant and machinery $10,000,000 Bonds $ 5,000,000 
 
 Cash 1.000,000 Stock 5,000,000 
 
 Dividend No. 1 1.000,000 
 
 Total $11,000,000 $11,000,000 
 
 (d) After the Dividend is Paid. 
 
 Assets. Liabilities. 
 
 Plant and machinery $10,000,000 Bonds $ 5,000.000 
 
 Stock 5,000.000 
 
 Total $10,000,000 $10,000,000 
 
 — — ■ —7 
 
 B — II— 7 
 
98 MAURICE H. ROBINSON 
 
 Generally the right to declare dividends is granted to 
 the directors of a corporation. Under such circumstances 
 the stockholders cannot by vote require them to take action 
 upon the question of dividends, much less fix the rate at 
 which they shall be declared. However, when once a divi- 
 dend is declared by the board of directors, the individual 
 stockholders have the right to share in it in proportion to 
 their stock. Moreover they can collect the amount due 
 them from the corporation by use of the legal method of 
 collecting debts. ■^Vllenever there are two or more classes 
 of stock, the respective rights of each class are fixed in the 
 charter. The holders of shares in any class then have the 
 right to dividends as they are declared, but as individuals 
 they have no right on account of owning a superior class 
 of stock to compel the directors to authorize a dividend. 
 For example, the holder of seven per cent cumulative pre- 
 ferred stock has no legal right to a di\^dend at all except 
 when such is duly authorized by the board of directors. In 
 this respect all classes of stockholders are in the same rela- 
 tive position. 
 
 At the dissolution of a corporation, whether by limita- 
 tion, by legislative act, or by insolvency, the stockholders 
 have the right individually to share proportionately in the 
 assets, after all debts for which the corporation is legally 
 liable are satisfied. This is the rule where there is one 
 class of stock only. Where there is preferred stock as well 
 as common stock, it is usually provided by statute that 
 such stock must be paid in full before any distribution can 
 be made to the general or common stockholders. Such is 
 the New Jersey law. It is however usually possible to 
 provide in the charter that superior stock may be preferred 
 as to dividends only, and that in this case it shall share 
 the assets equally with the common stock when the corpo- 
 ration is dissolved. In such cases all stockholders have the 
 right to share equally in the assets of the corporation. 
 
MODERN BUSINESS ORGANIZATION 99 
 
 Liabilities of Stockholders. 
 
 In general, stocklioldei^ are free from any personal lia- 
 bility for debts due the creditors of a corporation. This 
 principle was adopted, as has been shown in an earlier 
 section, as a result of the recognition of the personality of 
 the corporation. It however involves a complementary 
 principle, namely, that each share of stock shall be paid for 
 in full at the inception of the company, and that the assets 
 have been maintained intact since organization. It is 
 not unusual, however, for a corporation to provide for 
 the issuance of, for example, ten million dollars' worth of 
 capital stock, and to begin business on one-fourth of that 
 amount by calling for twenty-five per cent only of the face 
 value of the stock issued, specifying that the remainder, 
 namely, seventy-five per cent, may be paid in installments 
 or upon call by the board of directors. In such cases the 
 individual stockholder is, of course, liable for the unpaid 
 balance to satisfy the claims of the creditors. 
 
 A more complicated case arises where the same con- 
 dition exists with this exception : That the stock so issued 
 is subject to no further calls for payment, but is called fully 
 paid and non-assessable. Here the corporation cannot by 
 its own vote assess outstanding stock, but if in the course 
 of business it incurs indebtedness in excess of its coi'porate 
 assets, it is the duty of the courts to compel the individual 
 stockholders to pay up in full or as much thereof as is 
 needed to pay all just obligations. 
 
 Wliere the stock is paid for in cash or its equivalent, 
 the case is a clear one and presents no difficulties. "Wliere, 
 however, as so often occurs, part of the stock is issued in 
 exchange for property whose value is not well established, 
 the application of this principle is exceedingly perplexing. 
 Suppose, for example, a partnership has outgrown the 
 proper limitations of this form of business organization, 
 and is converted into a corporation. Tlie partners become 
 
100 MAURICE H. ROBINSON 
 
 stockholders and issue stock to themselves against their 
 former partnership interests. The value of the partner- 
 ship property may be difficult to ascertain, and the stock 
 issued, as it appears, may be in excess of the real value 
 of the property. Conditions may change; the business 
 may become unprofitable and bankruptcy may follow. The 
 claims of the creditors exceed the selling value of the 
 assets and either the creditors must lose or the stockhold- 
 ers must be assessed by the courts to make up the deficit. 
 The question then turns upon the valuation of the assets 
 and the relation of such valuation to the amount of stock 
 issued. 
 
 Such cases where no fraud in valuation was originally 
 intended present unusual difficulties, and led to the adop- 
 tion of the clause in the New Jersey statute providing that 
 where stock is issued for property, in the absence of actual 
 fraud in the transaction, the judgment of the directors 
 as to the value of the property purchased shall be conclu- 
 sive. 
 
 Even where the stock issued at the organization of the 
 corporation was paid for in full, it is, of course, possible, 
 by paying dividends out of the capital assets, to create a 
 real deficit, and thus, in cases of insolvency, defraud the 
 creditors, unless either the stockholders or the directors 
 or both can be held liable for the amount thus diverted 
 to the stockholders. Where the accounts are accurately 
 and honestly kept, the declaration and payment of such a 
 dividend would, of course, show upon the books and the 
 prospective creditors could, if they had access to such ac- 
 counts, make allowance for the deficit; but usually where 
 such dividends are declared the accounts are '* doctored" 
 so that the true condition of the corporation's finances 
 are concealed. 
 
 To illustrate this situation, let us assume that a corpo- 
 ration is engaged in mining copper. Its deposits of copper 
 are estimated to be worth $8,000,000 and its plant $2,000,- 
 
MODERN BUSINESS ORGANIZATION 101 
 
 000. It bas outstanding $10,000,000 in par value of capital 
 stock. After operating for a year it has taken out one- 
 eighth of its entire copper deposits and has, after paying ex- 
 penses, $1,000,000 in cash. Its correct financial status at 
 this time is shown in the following: 
 
 BALANCE SHEET. COMPANY I. 
 Assets Liabilities 
 
 Copper ore $ 7,000,000 Capital Stock $10,000,000 
 
 Plant and Machinery 2,000.000 
 
 Cash 1,000,000 
 
 $10,000,000 $10,000,000 
 
 Having cash in the treasury, the directors may declare 
 a dividend though it is evident that it must be paid out of 
 assets rather than out of profits. Disliking to acknowledge 
 the real condition of affairs, the directors declare a divi- 
 dend of 8 per cent and at the same time inflate the assets 
 by the same amount. The financial condition of the com- 
 pany after this adjustment has been made is shown in the 
 following: 
 
 BALANCE SHEET. COMPANY I. 
 
 After Declaring Dividend. 
 
 Assets Liabilities 
 
 Copper ore $ 7.500,000 Capital Stock $10,000,000 
 
 Plant and machinery 2,500,000 ©ividend No. 1 800,000 
 
 Cash 1.000,000 Surplus 200,000 
 
 $11,000,000 $n.nno,nno 
 
 Assuming that the stockholders have the right to ex- 
 amine the books or that full accounts are published and 
 distributed among them, the conclusion reached by the 
 average stockholder will be somewhat as follows: The com- 
 pany has taken out $500,000 worth of ore and has sold it 
 at prices netting $1,000,000 after paying operating ex- 
 penses. At the same time the plant and the machinery 
 have been improved by the expenditure of $500,000. A 
 dividend of 8 per cent then distributes only four-fifths of 
 
102 MAURICE H. ROBINSON 
 
 the net income for the year. This condition is highly grati- 
 fying to the stockholders and they accept the dividend de- 
 clared and compliment the management. 
 
 Let us suppose this process is continued for several 
 years and the stock of ore begins to show exhaustion. 
 Every ton mined is encumbered with an increased cost of 
 production and when the ore is exhausted the plant is like- 
 ly to be practically worthless. If, during this period, debts 
 are allowed to accumulate, the creditors find themselves 
 secured by an empty mine and a plant whose value is de- 
 pendent upon the value of the ore deposits. It is plain, 
 therefore, that the creditors cannot have their claim satis- 
 fied through the sale of the assets. Who, then, ought to 
 make such claims good? Clearly the directors who have 
 been declaring dividends out of the assets, and, since the 
 stockholders constitute the corporation, and are liable for 
 the election of the directors, and have, at the same time, 
 been receiving the assets in the form of dividends, they 
 should pay such just debts rather than shift them upon 
 those business enterprises from whom they have been pur- 
 chasing materials or receiving credit. 
 
 Recognizing the equity of this principle, the legisla- 
 tures and the courts in the United States have generally 
 prescribed by law and judicial decision that stockholders 
 are liable to creditors of the corporation when insolvency 
 is caused by the pa;\Tnent of dividends out of the assets. 
 And this is the general rule even though the stockholders 
 have themselves been deceived as to the real condition of 
 the finances of the company. 
 
 The stockholders are also individually liable to the 
 creditors of the company where a similar financial condi- 
 tion has been brought about in a more formal way, namely, 
 by reducing the amount of the capital stock and distrib- 
 uting a proportionate part of the assets to the individual 
 shareholders. The principle involved in all these cases 
 is one and the same. The individual stockholder is freed 
 
MODERN BUSINESS ORGANIZATION 103 
 
 from liabilit}^ for debts upon condition that the par value 
 of stock is represented by actual assets of equal value 
 throughout the life of the corporation and so long as any 
 imsatisfied creditors are in existence. 
 
 In some of the states, notably New York, Indiana, 
 North Dakota, Pennsylvania, South Dakota and Tennes- 
 see,* special consideration is shown the employe by per- 
 mitting him to recover directly from the individual stock- 
 holders wherever he is unable to obtain the payment of his 
 just dues for service rendered from the corporation itself. 
 And in two of the states, Califomiia and jNFinnesota, all 
 stockholders are subject to a double liability as are stock- 
 holders in the national-banking corporations formed under 
 federal law. 
 
 The Creditors. 
 
 Every business enterprise, whatever the form of organ- 
 ization, is constantly using capital and labor furnished on 
 credit by investors, other business enterprises and work- 
 men, and consequently, the rights of such creditors are of 
 considerable importance to the corporation. A part of the 
 creditors are usually secured by the pledge of certain 
 definite portions of the assets. The remainder are secured 
 only by claim upon the general assets. In general the em- 
 ployes take precedence over all other classes of unsecured 
 creditors, and in some of the states, as noted above, may 
 even collect from the stockholders of the coi^Doration when 
 unable to do so from the corporation itself. 
 
 The rights of creditors become of special importance in 
 cases of insolvency. Under such circumstances their 
 claims may be satisfied in full by the contribution of addi- 
 tional capital on the part of those holding the contingent 
 interest, or such creditors may become either bondholders 
 or stockholders or both, in the reorganized company as 
 
 *In some of the above states all corporations formed under the general 
 act are included. In others only mining, manufacturing and other mdus- 
 trial corporations are subject to this rule. 
 
104 MAURICE H. ROBINSON 
 
 the case may seem to warrant. So long as their claims are 
 paid when due, the creditors, like the bondholders, have no 
 right to interfere in any way in the management of the 
 enterprise. 
 
 The Directors. 
 
 The directors of a corporation, being at the same time 
 stockholders, are, in their latter capacity, subject to all 
 of the liabilities and possess all of the rights which belong 
 to the latter body. In their capacity as directors of the 
 corporation, however, they act as the chosen leaders of the 
 stockholders of the corporation in managing its affairs, 
 and on this account possess certain additional rights and 
 are subject to certain additional liabilities which need 
 enumeration and explanation. 
 
 The duties of the directors are stated in a general way 
 in the corporation acts of the several states. They are 
 further enumerated in the charter or in the by-laws, usu- 
 ally the latter. They are defined at length in the judicial 
 decisions that have been handed down from time to time 
 by the English and American courts. In general the du- 
 ties of the directors of a corporation are as follows: 
 
 1. To manage the business affairs of the corporation. 
 
 2. To arrange for meetings of the stockholders and to 
 furnish, when required, by the state laws or the by-laws, 
 annual reports showing the financial condition of the cor- 
 poration. 
 
 3. To fill vacancies in their own number, such ap- 
 pointments to hold until the next meeting of the stock- 
 holders. 
 
 The Directors as Managers. 
 
 The Illinois corporation act states that ^'the corporate 
 powers shall be exercised by a board of directors or mana- 
 gers." Beyond providing that the directors may adopt 
 by-laws for the government of its officers and the affairs 
 of the company, requiring them to keep correct books of 
 
MODERN BUSINESS ORGANIZATION 105 
 
 account of all the Inisincss, and specifying the penalties 
 for declaring dividends out of capital, the manner in which 
 thov may exercise such corporate powers is loft largely 
 to the board, subject, of course, to the jurisdiction of the 
 coui*ts. 
 
 The New Jersey statute is quite similar, providing that 
 **the business of every corporation shall be managed by its 
 directors." ** Individual stockholders," said Vice Chan- 
 cellor Green of New Jersey in Ellerman v. Chicago Junc- 
 tion Railways, Etc., Co.,* ''cannot question, in judicial 
 proceedings, corporate acts of directors if the same are 
 within the powers of the corporation, and, in furtherance 
 of its purposes, are not unlawful or against good morals, 
 and are done in good faith and in the exercise of an honest 
 judgment. Questions of policy of management, of expedi- 
 ency of contracts or action, of adequacy of consideration 
 not grossly disproportionate, of lawful appropriation of 
 corporate funds, are left solely to the honest decision of 
 the directors if their powders are without limitation and 
 free from restraint. To hold otherwise would be to substi- 
 tute the judgment and discretion of others in the place of 
 those detenniued on by the scheme of incorporation." 
 
 As managers of the corporation, then, the directors, 
 under the statute law and within the limitations fixed by 
 the charter and by-laws are authorized and expected to 
 organize the operating departments of the business, to em- 
 l)loy, supervise and discharge all officers and woi-kmen, to 
 keep full and correct books of account, to outline in a gen- 
 eral way tlie financial policy and business activities of the 
 corporation, to detennine the net earnings of the cnni]")any 
 annually, and declare the same in dividends or reinvest the 
 siu'plus in improvements, where such policy is pennitted 
 by the state laws, and in general to exercise tlie same 
 supervision over the affairs of the company as an individ- 
 ual proprietor would over his own property. In its man- 
 
 *49 New Jersey Equity. 
 
106 MAURICE H. ROBINSON 
 
 agemen't, however, the directors are required to act, not as 
 individuals, but as a single body. All important questions 
 of business policy and all important contracts must come 
 before them for consideration and action at regular or 
 special meetings. Matters of routine may, of course, after 
 the general policy has been determined, be entrusted to the 
 proper officers to be carried into execution. 
 
 The three really important functions of the directors as 
 managers are: First, to organize the business into depart- 
 ments, select or approve, on recommendation of a commit- 
 tee, the heads of such departments, and authorize the 
 appointment of assistants and the employment of work- 
 men; second, to determine, in a general way, the activities 
 of the corporation, requiring all important contracts and 
 questions of business policy to come before them for direct 
 action, but giving heads of departments considerable lib- 
 erty in the execution of the general policies established by 
 them: such liberty of action will generally be exercised 
 without abuse, providing full reports are submitted regu- 
 larly to the directors; and third, to determine the dividend 
 policy of the corporation. 
 
 It has been said that a corporation is created for the 
 purpose of earning profits and dividing the same among 
 the stockholders in the form of dividends. In the case of 
 business corporations this is undoubtedly true, but as 
 shown above, it is sometimes better business policy to with- 
 hold dividends for a period of years and use the surplus 
 earnings for improvement of plant or machinery, or for 
 the extension of the activities of the company rather than 
 distribute the profits annually. Which of these two poli- 
 cies is better depends largely upon conditions that vary 
 in specific cases. Hence every corporation presents a sepa- 
 rate and distinct problem, but the following may be laid 
 do^\Ti as a general principle. In a country rapidly develop- 
 ing from the technical and industrial point of view, every 
 business enterprise is likely to need for the most efficient 
 
MODERN BUSINESS ORGANIZATION 107 
 
 operation, more and more capital, a larc^or and larc^er plant 
 or plants, and more oxponsivo machinery as tlie years go 
 by. If all of the annual earnings are distrilnited annually 
 to the shareholders, the enterprise will become less and 
 less efficient relatively, and in the course of time insolvent. 
 To avoid this unfortunate contingency additional capital 
 must be invested in the enterprise. Such additional capital 
 may come from outside sources or from those who now 
 hold the stock. If the enterprise is a prosperous one, those 
 now holding its shares will naturally wish to furnish the 
 new capital and thus continue to control it. Tliey may 
 accomplish their purpose either by declaring all the earn- 
 ings in dividends annually and increasing the capital stock 
 as needed, or by foregoing dividends and using the surplus 
 to improve the plant. As the former of the two processes 
 is attended with more or less expense, it is often better 
 policy to adopt the latter course. 
 
 To forego dividends, however, even for a period, has 
 one disadvantage. It is particularly imfortunate for those 
 shareholders who depend on their dividends for a 
 whole or a part of their annual living expenses. The di- 
 rectors, therefore, in determining upon a dividend policy 
 ought to take into consideration the character of the stock- 
 holders and the effect of withholding the annual earnings 
 upon those who need such income to meet their own living 
 expenses. Wliile the policy of withholding dividends for 
 the purpose of improving the plant may thus be defensible 
 from the standpoint of the corporate enterprise, it may be 
 harmful to the welfare of a considerable portion of its 
 shareholders. 
 
 On the other hand the directors may adopt the policy 
 of declaring dividends in excess of the actual earnings, 
 concealing the practice by padding the assets. Such prac- 
 tice is usually forbidden by statute law and by the by- 
 laws of every respectable company, and is further discour- 
 aged by making the directors liable to the creditors for any 
 
108 MAURICE H. ROBINSOK 
 
 loss sustained thereby. This penalty, however, does not 
 protect the interests of the stockholders whose future 
 prospects may in this way be partially or wholly ruined. 
 
 It has been assumed in the foregoing discussion that 
 the directors, in deciding their policy, have the best inter- 
 ests of the company at heart. It will be evident on reflec- 
 tion, however, that the power to declare or withhold divi- 
 dends may be used for illegitimate purposes, among which 
 that of causing fluctuations in the price of the stock is the 
 most pernicious. It has been noticed that one of the ad- 
 vantages of the corporation is the ready transferability of 
 its shares. To facilitate such transfers stock exchanges 
 are established and maintained in the larger cities. The 
 stock of each corporation of public importance is being 
 regularly bought and sold on the exchanges or on the curb 
 which grows up about the exchanges and one of the impor- 
 tant criterions by which the price of the stock is governed 
 is the dividend rate. To increase this rate causes an ad- 
 vance in the selling price of the stock. To lower the rate, 
 the reverse. And this is true even though such changes in 
 the dividend rate bear no direct relationship to the annual 
 earning rate of the company. Consequently, the board of 
 directors may withhold dividends or reduce the rate even 
 where the earning power is unchanged, and thus cause the 
 stock to sell at a lower price. Later they may increase 
 the rate and thus cause an advance in price. They may, 
 as individuals, purchase the stock when it is selling at a 
 low price and sell it later when it is going at a higher price. 
 
 Thus the directors may, by changing the dividend rate, 
 cause variations in the price of stock and take advantage 
 of their own action as directors to enrich themselves as 
 individuals at the expense of the other stockholders. Such 
 practices, while not sanctioned in the better corporations-, 
 have been altogether too common in American corpora- 
 tion finance to be overlooked. Since the directors are, 
 under ordinary circumstances, permitted by law to declare 
 
MODERN BUSINESS ORGANIZATION 109 
 
 (lividoTifls Avlion mid at wliat rate thoy sco fit, the only 
 effective safeguard in the liands of the stoekholders is the 
 power to change tlie directors at the annual elections. 
 
 The Directors and the Stockholders. 
 
 A second function of tlic directors is to arran(]^e through 
 the proi^er officers for the regular meetings of the stock- 
 holders and see that matters properly coming before them 
 are presented in an orderly way and that the action taken 
 is correctly recorded and faithfully carried into effect. In 
 some states it is provided by statute, and in most corpo- 
 rations by the by-laws, that the directors shall keep accu- 
 rate books of account showing correctly and fully the trans- 
 actions of the company. In some states it is made the 
 duty of the directors to see that stockholders have access 
 to the books during business hours. In the by-laws of 
 many corporations it is also provided that a summarized 
 statement of the results of the business in the form of an 
 annual balance sheet showing the assets and liabilities 
 properly arranged and an income account showing the an- 
 nual income and outgo, be published and distributed to the 
 stockholders at or before the annual meeting. 
 
 The Directors and Vacancies. 
 
 The directors may ordinarily fill vacancies in their oaati 
 number, such appointments to hold until the next regular 
 meeting of the stockholders. The stockholders may, in 
 the by-law^s, provide for any other method of filling va- 
 cancies, or may permit such vacancies to remain until the 
 regular meeting for the election of officers. Usually a 
 director cannot be removed, either by the board or by the 
 stockholders, unless provision for such action is made in 
 the charter. In some states, however, a director may be 
 removed for misconduct in office by action at law institu- 
 ted through the office of the attorney-general of the state. 
 
no MAURICE H. ROBINSON 
 
 Liabilities of Directors. 
 
 The directors of a corporation in their capacity as tlie 
 organized administrative board in charge of its business af- 
 fairs are trustees for the stockholders and are expected to 
 use discretion in the management of its affairs, to conform 
 to the law of the states and to the provisions of the charter 
 and the by-laws. So long as they observe the above re- 
 quirements they are free to act in good faith according to 
 their own judgment. If, however, they fail to conduct the 
 corporate business in accordance with the above conditions, 
 they are ordinarily subjected to personaal liabilities for cer- 
 tain specific acts of which the following are the more im- 
 portant: 
 
 1. For declaring dividends except out of the surplus 
 profits. 
 
 2. For issuing stock as fully paid when in fact it is only; 
 partly paid for. 
 
 3. For disobedience to the laws of the state or states 
 in which the company is operating. 
 
 4. For failure to exercise reasonable care and good 
 faith in the management of the affairs of the corporate 
 business. 
 
 1. As it is the function of the directors to declare div- 
 idends so it is their duty to use discretion in such action and 
 to make distribution to the stockholders only out of the 
 surplus. For this reason, among others, they are required 
 to keep accurate books of accounts in order that they may 
 be satisfied that any distribution in the form of dividends 
 will not impair the solvency of the corporation. The Illi- 
 nois corporate act is especially explicit upon this point. It 
 states: ^*If the directors or other officers or agents of any 
 stock corporation shall declare and pay any dividend 
 when such corporation is insolvent, or any dividend the pay- 
 ment of which would render it insolvent, or which would 
 diminish the amoimt of its capital stock, all directors, of- 
 
MODERN BUSINESS ORGANIZATION 111 
 
 ficcrs or agents assenting thereto sLall be jointly and sev^er- 
 ally liable for all the del)ts of snch corporation then exist- 
 ing, and for all that shall thereafter be contracted while 
 they shall, respectively, continue in office." 
 
 The New Jersey act is essentially the same T\dth the pro- 
 vision that any director who was absent at the time the 
 dividend was declared or who dissented from the action 
 when it was taken, mRj exonerate himself from the liabil- 
 ity by causing his dissent to be entered at large on the min- 
 utes or by publishing notice of his dissent in a newspaper 
 in the county where the corporation has its principal office. 
 The directors, then, being responsible for the declaration of 
 dividends which have not been earned, are thus in the first 
 instance held liable, jointly and individually, for losses 
 caused the creditors of the corporation. Accordingly the 
 stockholders who ultimately are liable for such distribution 
 of the assets are ordinarily protected from loss through the 
 prior liability of the directors. 
 
 2. In a similar way the directors are personally liable 
 for losses occasioned by failure to provide for the full pay- 
 ment of the stock at the organization of the company. This 
 provision rests upon essentially the same principle. Fail- 
 ure to pay for the stock in full at the organization causes a 
 deficit at the beginning of the corporate existence. The 
 declaration of dividends out of capital brings about exactly 
 the same condition after the coiporation has been in opera- 
 tion. In either case the responsibility is rightly thrown 
 upon the directors who are entrusted with the management 
 of the corporate affairs. 
 
 3. In the third case the situation is somewhat different. 
 The stockholders, having no voice in the ordinary- affairs of 
 the corporation, are not in a position to know whether the 
 laws are being observed or violated. Tlie directors are. 
 Hence any loss sustained by the corporation on this ac- 
 count is properly thro^^^l on the directors. It is thus their 
 dut}^ to know the legal conditions under which the corpora- 
 
112 MAURICE H. ROBINSON 
 
 tion is operated and to see that its business is conducted in 
 a lawful manner. For this purpose, all corporations need 
 the advice of competent legal counsel and the larger ones 
 make the legal department an essential part of the corpo- 
 rate organization. 
 
 4. The fourth case presents greater difficulties in prac- 
 tice, although it is in theory entirely in accordance with 
 the principles of corporate management. Directors are 
 chosen for two purposes: First, because it is impracticable 
 for the whole body of stockholders in a corporation of con- 
 siderable size to participate in its management — hence, its 
 management is entrusted to a selected few; second, it is or- 
 dinarily expected that by selecting a few of the stockhold- 
 ers to act as managers of the company, a higher order of 
 business capacity and judgment may be secured. It is on 
 the second of these two propositions that the requirement 
 that the directors must exercise reasonable care and good 
 faith in the conduct of the corporate business rests. Hav- 
 ing been selected as the chosen few on account of their su- 
 perior business ability, the directors are properly held indi- 
 vidually liable for indiscretion in business policy and fraud 
 in actual transactions. 
 
 The enforcement of this principle of corporate manage- 
 ment is, however, full of difficulties. It is not easy to deter- 
 mine in advance the wisdom of all questions of business 
 policy, and to throw the burden for losses upon the directors 
 when they acted in good faith, w^ould hardly appeal to the 
 courts of equity. Consequently, it is, as a matter of fact, 
 only in cases of actual fraud that directors are ordinarily 
 held liable. Here the case is clearer. It is, of course, 
 sometimes impossible to determine where the responsibil- 
 ity lies even in such cases, but usually the courts have been 
 able to determine the facts and in many such cases to hold 
 the guilty directors responsible for their fraudulent actions. 
 Owing to the difficulty in proving fraud it is ordinarily pro- 
 vided that a director may not participate in corporate ac- 
 
MODERN BUSINESS ORGANIZATION 113 
 
 tion in case of contracts in which lie is personally inter- 
 ested. In view of the difTficnlties involved in the enforce- 
 ment of the liability to which directors are subjected for 
 misnianao^ement and fraud, it is undoubtedly true, as has 
 so often been said, that the best safef]^uard of shareholders 
 lies in the choice of an experienced and honest board of 
 trustees. 
 
 The Corporate Officers. 
 
 The officers of a corporation may be divided into two 
 classes, dependent upon their relationship to the corporate 
 organization. The first class includes those whose duties 
 are intimately connected with the affairs of the corporation, 
 the second class those whose duties are connected with its 
 external operations. Since we are now considering the or- 
 ganization of the internal affairs of the corporation, the 
 duties of the officers included Avithin the first class will be 
 treated here Avhile those of the second class will be con- 
 sidered in the following section. 
 
 As already noticed, certain of the officers of a corpora- 
 tion are considered so necessary to its welfare that they 
 are usually named in the corporation act and their duties 
 there outlined, for the purpose of prescribing in detail the 
 responsibilities of each officer. In addition, as a result of 
 judicial decisions, the officers of a corporation are subject- 
 ed to various personal liabilities for failure to perform the 
 duties assigned them in a faithful and honest manner. Tlie 
 corporate officers always include the president, the vice- 
 president or vice-presidents, the secretary and the treasur- 
 er. In the more complex corporations there are, in addi- 
 tion, a chairman of the board, an executive committee, a 
 general counsel, and a comptroller. 
 
 Some of the above officers, as, for example, the secretary", 
 may be entirely occuj^ied with duties pertaining to the cor- 
 porate organization. Others may serve in double capac- 
 
 B— II— 8 
 
114 MAURICE H. ROBINSON 
 
 ity, first as officers of the corporate organization, and sec- 
 ond as officers of the operating organization. It is in the 
 former capacity that we are now considering them. The 
 corporate duties of each of the above officers have been 
 described in the section on the by-laws. It is the purpose 
 of this section to enumerate the personal liabilities to which 
 they are subjected for negligence or wrong doing in con- 
 nection with their official duties. 
 
 In the first place, under the common law, officers of the 
 corporation are generally liable for damages resulting from 
 failure to properly perform their duties or for illegal action 
 of any kind. This subject is fully treated in the law of 
 officers and every officer of a corporation should be thor- 
 oughly informed in regard to his liabilities as well as his 
 duties. In the second place the corporation acts of the 
 several states add certain specific liabilities for failure to 
 perform certain prescribed duties. 
 
 Among the more important of these prescribed duties 
 are the following: 
 
 1. Officers are required to keep the stock and transfer 
 books open for inspection during business hours. 
 
 2. Officers are not permitted to make loans to any offi- 
 cer or stockholder. 
 
 3. Officers render themselves personally liable for all 
 debts of a corporation created by signing false certificates 
 and false notes. 
 
 4. Officers signing false certificates render themselves 
 criminally liable for such action. 
 
 5. In some states officers tampering with the entries 
 in books of account and other corporate records are de- 
 clared guilty of forgery and subjected to the penalties 
 thereof. 
 
MODERN BUSINESS ORGANIZATION 115 
 
 y. ORGANIZATION FOR OPERATION. 
 
 The Proprietorship and the Operating Organization. 
 
 Tlie nature of the ownership, whether individual pro- 
 prietor, the partnership or the corporation, determines in a 
 general way the chief characteristics of the internal organ- 
 ization of any business enterprise. Every business organ- 
 ization is, however, created for the purpose of undertaking 
 some specific phase or phases of the industrial or commer- 
 cial activities of the coimtry wherein it is located. The 
 nature of those activities, while affecting, as already ob- 
 served, the character of the internal organization, is the con- 
 trolling factor in determining the general features and, to a 
 somewhat less extent, the details of the operating organiza- 
 tion. For example, a cotton factory may be owned and 
 managed by an individual proprietor, by a partnership, by 
 a corporation, or by a co-operative society. The character 
 of the ownership, however, has almost no influence on the 
 working or operating organization of the factory. Indeed, 
 the expert operative might work in either one for years and 
 never know which form of organization the factory was 
 operating under. The plant would show no material differ- 
 ence, the machinery would be practically identical, the oper- 
 ations would be carried on in the same way and the product 
 turned out could not be distinguished. 
 
 General Principles of Organization. 
 
 The operating organization being determined not by 
 the ownership but by the character of the work undertak- 
 en, it follows that there are certain general principles 
 which underlie the organization of all operating business 
 enterprises and that these general principles are observ^ed 
 by all well-manac:ed enterprises without regard to their 
 internal organization. The more important of these gen- 
 eral principles are as follows : 
 
116 MAUEICE H. ROBINSON 
 
 1. The executive authority should be centralized in 
 form and entrusted to one individual or a small group of 
 individuals working under definite responsibility but pos- 
 sessing considerable freedom in the choice of ways and 
 means. 
 
 2. The operations should be sub-divided into depart- 
 ments, each department having a certain specific work to 
 do and in its work subject to the general supervision of the 
 central executive but being entirely independent of every, 
 other department. 
 
 The Executive. 
 
 In the individual proprietorship the executive ordina- 
 rily is the proprietor himself, although in some cases the 
 proprietor employs a chief executive called a general man- 
 ager and delegates to him the executive functions. In the 
 partnership the members, jointly and severally, usually 
 act as the chief executive, parcelling out the functions 
 among themselves or entrusting such duties to one of their 
 own number designated as managing partner. The part- 
 nership, however, may employ a general manager and thus 
 relieve themselves of the active duties of the management. 
 In the corporation the executive function is always exer- 
 cised by a selected few, sometimes consisting of a group of 
 persons designated as an executive committee, sometimes 
 consisting of one person under the title of president. In 
 certain cases both an executive committee and a president 
 are provided for in the organization. When such is the case 
 the executive committee is the supreme executive author- 
 ity and the president is an officer of the executive commit- 
 tee, carrying out its instructions in regard to the general 
 policy and having considerable discretion in regard to the 
 actual details of the executive duties. 
 
 The executive thus occupies an intermediate position 
 between the proprietorship and the business operations, re- 
 ceiving general instructions as to policy from the proprie- 
 
MODERN BUSINESS ORGANIZATION 117 
 
 torsliip and issuing spcrifir directions to the several heads 
 of departments for tlie pnrpose of carrying ont the general 
 policy into practical results. This relationship may he il- 
 lustrated by the following table which, in a rough way, 
 shows all the component parts of a complete business or- 
 ganization. 
 
 Ultimate 
 Authority. 
 
 Individual 
 proprietcNr. 
 
 Partnership. 
 
 3. Corporation. 
 
 Co-operative 
 society. 
 
 General 
 
 Policies. 
 
 Individual 
 proprietor. 
 
 Partners. 
 
 Stockholders 
 and directors. 
 
 Society and the 
 committee. 
 
 Chief 
 Executive. 
 
 Individual 
 
 proprietor 
 
 or General 
 
 Manager. 
 
 Partners, 
 severally, or 
 Managing 
 partner. 
 
 Executive com- 
 mittee or 
 President. 
 
 Executive com- 
 mittee or 
 President. 
 
 1 
 
 f Departments. 
 
 Legal. 
 
 H 
 
 Accounting 
 
 Purchasing 
 
 Manufacturing 
 
 Sales 
 
 Transportation. 
 
 ^Vhile the character of the chief executive varies with 
 the nature of the proprietorship and, to a less extent, with 
 the size of the business and the scope of its operations, in 
 all cases this office has one feature in common, namely, its 
 intermediate position as the medium through which the ul- 
 timate authority finds expression in concrete results 
 through the operation of the several departments. 
 
 The Single v. the Plural Executive. 
 
 Wliether the executive shall be a single head or a group 
 of individuals, acting as one, depends largely upon circum- 
 stances. In the individual proprietorship, the executive 
 head ordinarily is, as stated above, either the proprietor 
 himself or a general manager under his employment. 
 While not customary, it is, however, possible for an indi- 
 vidual proprietor to entrust the executive duties connect- 
 ed with his business to an executive committee of the usual 
 
118 MAURICE H. ROBINSON i 
 
 size and standing in the same relationship to him as the 
 executive committee of a corporation stands to the stock- 
 holders and directors. 
 
 The partnership, on the contrary,^ usually has a plural 
 executive head, all the partners participating impartially in 
 the executive duties. This feature of the partnership is, 
 as is well known, one of the weaknesses of this form of or- 
 ganization and this fault is sometimes corrected by the ap- 
 pointment of one of the partners as the managing partner. 
 The partners then, as a body, formulate the general policy 
 and the managing partner carries it into execution. 
 
 The corporation formerly always had a single executive 
 head in the person of the president. In recent years, owing 
 largely to the complexity of the work conducted by the 
 greater corporations, it has been found advisable to entrust 
 the executive duties to a committee selected from the direct- 
 ors and officers and to make the president the head of this 
 executive committee. The executive committee then de- 
 cides on the more important questions of administration and 
 the president supervises and directs the work of the several 
 departments each of which, under its own staff, is actively 
 engaged in the detailed work of trade and industry. In 
 this respect the co-operative society resembles the ordinary 
 corporation. 
 
 For small business enterprises, whatever the character 
 of the internal organization, the single executive head pos- 
 sesses marked advantages over the plural. The single exec- 
 utive is able to act promptly and thus take advantage of 
 opportunities not open to the slowly moving executive com- 
 mittee. Furthermore, in the partnership with several part- 
 ners, and in the small corporation, the directors act as 
 an executive committee, not only formulating policies but 
 making plans for their prompt and efficient execution. In 
 the larger corporations the executive committee system 
 has been adopted for two reasons: First, the manage- 
 ment of such business enterprises is entirely beyond the 
 
MODERN BUSINESS ORGANIZATION 119 
 
 capacity of any one man, owing partly to its physical extent 
 and partly to the variety of o]:>orations condnctecl, and sec- 
 ond, the executive is obliged to detenninc questions coming 
 up daily of so great moment that they demand the combined 
 judgment of several men. While in most cases the decision 
 of the one-man executive would not involve the company 
 in disaster, it is the exceptional instances that must be 
 guarded against. The executive committee system, as com- 
 pared with the single executive, lacks somewhat in prompt- 
 ness of execution but more than offsets this advantage by 
 the unifoiTti wisdom of its decisions on important ques- 
 tions of business policy and business practice. 
 
 Responsibility to the Proprietorship. 
 
 The chief executive is in theory, and should be in prac- 
 tice, either directly or indirectly responsible to the ultimate 
 authority, that is, to the individual proprietor, the partners, 
 the corporation or to the co-operative societ}^ as the case 
 may be. In the first two cases, there is ordinarily no dif- 
 ficulty in this respect. In the corporation and the co-opera- 
 tive society, however, the chief executive may, in practice, 
 become so far independent of the authority to which it is 
 responsible as to present entirely new problems of busi- 
 ness management. Tlie following statement of ^Ir. Jacob 
 H. Schiff, before the New York Legislative Insurance In- 
 vestigating Committee in 1905* represents an extreme case 
 and is hardly typical of the situation as a whole. Still it is 
 sufficiently true to bear repetition. He said: 
 
 **The system of directoi^hip in the great corporations of 
 the City of Xew York is such that a director has practically 
 no power: he is considered in many instances, and T may 
 say in most instances, as a negligible quantity by the exec- 
 utive officers of the society; he is asked for advice when 
 it suits the executive officers, and if under the prevailing 
 system an executive officer -washes to do wrong, or wishes to 
 
 ♦Report Page 1000. 
 
120 MAURICE H. ROBINSON 
 
 conceal anything from his directors, or commits irregular- 
 ities, the director is entirely powerless; he is only used in an 
 advisory capacity, and can only judge of such things as 
 are submitted to him. Directors are of very little use ex- 
 cept to comply with the formal provisions of the law." 
 
 The accuracy of Mr. SchifE's assertion is confirmed by; 
 the fact that certain capitalists occupy the position of di- 
 rector in as many as sixty different corporations, while at 
 the same time actively engaged as president or manager of 
 the same or other similar business enterprises. It is appar- 
 ent that where an individual acts as a director in many en- 
 terprises he cannot give each of them the personal attention 
 that is necessary to insure the adoption of a wise business 
 policy. What more natural, then, than that he should look 
 to those having a more intimate knowledge of the com- 
 pany's affairs for guidance and thus the directors become 
 the servants, and sometimes the tools, of the executive of- 
 ficers. Where the executive officers are able and honest 
 administrators, the affairs of the corporation suffer no harm, 
 but where, as in some cases, such persons are unwise, selfish 
 or actually dishonest, the stockholders who assmne that 
 their rights are being guarded by the directors, suffer the 
 consequences in the ultimate wreck of the corporation. 
 
 No practical remedy for this condition has, as yet, been 
 proposed. It would seem unwise to hasten the consolida- 
 tion of the corporations by limiting the number of corpora- 
 tions in which a person may hold directorships and yet it 
 might be better to have fewer and larger corporations if by 
 so doing a better and more responsible management could 
 thus be secured. It may prove advisable to require direc- 
 tors to give more personal attention to important matters 
 and thus secure, in an indirect way, what may not be advis- 
 able by direct methods. It is, of course, true that each di- 
 rector entrusted as he is with the determination of the im- 
 portant questions of business policy ought to be informed in 
 regard to the financial condition of the corporation, in re- 
 
MODERN BUSINESS ORGANIZATION 121 
 
 ^ard to its wage system, its treatment of employes, its 
 priee policy, or its treatment of competitors, as well as its 
 eaniinc^s and dividends. The average director is too often 
 content when he finds the dividend rate satisfactory to him- 
 self and the other stockholders. 
 
 The Functions of the Executive. 
 
 The executive has two main functions: First, to exe- 
 cute the general policies fonnulated by the joroprietors or 
 the direct representatives of the proprietors of the enter- 
 prise; and second, to assist the management in the process 
 of organizing the operation of the company into depart- 
 ments, each with its own specific duties and responsibilities. 
 
 1. The proprietors, whether individuals, partners, stock- 
 holders or members of a co-operative society, under the 
 present constitution of our economic institutions, being re- 
 sponsil)le for the failure of the enterprise which they con- 
 trol, are properly expected and fonnally authorized to de- 
 teimine the character of the work to be undertaken, the use 
 of the capital invested, and the general problems of manu- 
 facturing and selling the goods. Except in those organiza- 
 tions where the proprietor and the executive are one and 
 the same person or group of persons, it is, however, mani- 
 festly impossible for this body to properly supennse the 
 actual execution of the policy which has been fonnulated 
 and adopted. 
 
 Tlie executive is, therefore, created for this particular 
 purjiose. For example, the directorate of a corj^oration has 
 decided to make an addition to the factory at a cost of $1,- 
 000,000. The executive causes plans to be prepared, pre- 
 sents them for the approval of the directorate, and after 
 such approval, superintends the erection of the extension. 
 Again, the directorate has decided to limit the output of the 
 goods manufactured by 10 per cent. The executive takes 
 the necessary steps to close down a part of the factory or 
 to work the whole force fewer hours. In still another case, 
 
122 MAURICE H. ROBINSON 
 
 the directorate determines that it is wise and proper to in- 
 crease the dividend rate from six to seven per cent. The 
 executive makes the necessary arrangements for the pay- 
 ment of such dividends by setting aside the funds and send- 
 ing out the dividend checks. 
 
 The work of the executive is, however, not confined to 
 carrying into operation the specific directions of the pro- 
 prietors. In many, indeed in most, cases the directors 
 formulate the policy of the corporation in general terms and 
 under such circumstances the executive is expected to act 
 upon its own judgment in the determination of ways and 
 means by which the policy is realized. For example, a cor- 
 poration, through its directors, has decided to adopt the 
 policy of absorbing its competitors wherever and whenever 
 opportunity offers. The executive is apprised of this pol- 
 icy and its function is then to secure control of rival com- 
 panies by the most appropriate methods. Thus, a consid- 
 erable amount of discretion must always be entrusted to the 
 executive and the success of the enterprise will depend 
 largely upon the wisdom the executive displays in using its 
 liberty. 
 
 The executive is, of course, in much closer touch with 
 the actual operation of the enterprise than the directors or 
 the proprietor and, therefore, in addition to its work above 
 described, it should prepare plans, make suggestions and 
 advise the adoption of such policies and practices as in its 
 judgment will prove conducive of the welfare of the com- 
 pany. When the corporation is operating in many lines 
 and especially where the directors are not only actively en- 
 gaged in business for themselves, but in addition sit as di- 
 rectors on many other boards, this particular function of the 
 executive assumes large proportions. Indeed, in many 
 cases, all new plans and propositions for the improvement 
 of the company's position habitually and normally come 
 from the executive department. Such plans, after con- 
 sideration and adoption by the responsible managers, will 
 
MODERN BUSINESS ORGANIZATION 123 
 
 then be put into actual operation by the execntive officers 
 as in other cases. On tlie other hand, the executive, in its 
 turn, relies upon the ideas and su,2:j?estions cominc^ from the 
 superintendents of factories and managers of departments 
 and it is customary in some of the better managed business 
 enterprises to offer premiums and rewards of various kinds 
 for suggestions looking toward the improvement of the 
 company's operations. 
 
 2. The second of the important functions of the execu- 
 tive is to supei^rise the organization of the operations of the 
 company into departments, to appoint the official heads of 
 each, and to see that each department not only does its own 
 work effectively, but at the same time co-operates with the 
 other departments with which it comes into active contact. 
 In this work there are two general methods of organiza- 
 tion. Tlie first is based upon the character of the work per- 
 fonned, the second upon geographical location. Tims, for 
 example, the American Smelting and Refining Company 
 sub-divides its operations into three grand departments 
 based upon economic considerations, namely, the purchas- 
 ing department, whose duty it is to purchase ores, the oper- 
 ating department, whose duty it is to reduce and refine ores, 
 and the sales department, whose duty it is to sell the fin- 
 ished product. At the same time the plants are organized 
 into groups based upon geographical location. For ex- 
 ample, the Colorado group comprises the plants located in 
 Colorado and vicinity with headquarters at Denver. The 
 southern group comprises the plants in Texas. Arizona, 
 New Mexico and Mexico, ^^ith headquartei-s in the City of 
 Mexico. 
 
 Of these two basic principles of organization, the geo- 
 gi'aphical has the advantage of economizing distance, the 
 functional or industrial, the work of supe^^^sion. ^Yliere 
 the operations are widely scattered as in the case of the 
 smelting company just mentioned, the geographical basis 
 must be observed to a considerable extent. Thus, wliile 
 
124 MAURICE H. ROBINSON 
 
 the corporation organizes its work into purchasing, refin- 
 ing and selling departments, it at the same time makes 
 nse of its resident managers of plants to act as local agents 
 of the purchasing department, thus saving the expenses 
 of a local purchasing agent. Where, however, the pur- 
 chasing of ores becomes of especial importance a resident 
 agent of the department is stationed. 
 
 Owing to the fact that most of the large corporations 
 operate plants located at considerable distance from each 
 other, and at the same time maintain purchasing or selling 
 agencies at these same points, it is usually found advisable 
 to follow the plan adopted by the smelting company and 
 thus to a certain extent use both principles of organization. 
 In such cases some of the officers serve in a dual capacity, 
 w^orking under one department head part of the time and 
 under another the remainder. Thus, while the manager of 
 a plant is managing the reduction of ore in the furnace, he 
 is responsible to the operating department, and reports to 
 the general manager. When, however, he is purchasing ore 
 he is responsible to the purchasing department and reports 
 to the general purchasing agent. Such overlapping of de- 
 partments is, however, directly contrary to the principle of 
 specialization and is, therefore, adopted only where the 
 work of one department is not sufficiently important to oc- 
 cupy the full time of an officer of the requisite capacity. 
 
 Functional Organization. 
 
 Wherever possible, the management finds it desirable to 
 organize the operating activities of the enterprise on the 
 basis of the character of the work which is being performed. 
 Consequently, when this method is followed, the number of 
 departments is determined by the extent of the activities 
 which the company undertakes. By referring to the sec- 
 tion on fundamental principles it will be noticed that the 
 industrial and commercial activities are separated natural- 
 ly into several groups, many or all of which may be under- 
 
MODERN BUSINESS ORGANIZATION 125 
 
 taken by a particular business entei*prise. If, for example, 
 Avc take the most extensive business enterprise known, 
 iianicly, the United States Steel Corporation, we find that 
 tliere is almost no phase of business activity which it is not 
 actually undertaking day by day, and on examination we 
 iind all of the following activities with the corresponding 
 departments in actual operation: 
 
 1. The legal department. 
 
 2. The accounting department. 
 
 3. The purchasing department. 
 
 4. The ore and coal department. 
 
 5. Tlie manufacturing department. 
 
 6. The sales department. 
 
 7. The traffic department. 
 
 All of these departments are, it will be obser^^ed, the in- 
 strumentalities through which the general executive con- 
 ducts the practical operations of the company. All of them 
 are, therefore, strictly speaking, subordinate to the central 
 authority. They differ among themselves in one impor- 
 tant particular, however, namely, some of them are general 
 departments, being connected with all the operations of the 
 company, while others are what may be called special de- 
 partments, having no necessary- connection with any other 
 branch of the business. In the tirst group are the legal de- 
 partment and the accounting department. In the second 
 group are the purchasing, the ore and coal, the manufiictur- 
 ing, the sales and the traffic departments. 
 
 The Legal Department. 
 
 Since every business enterprise is conducted under the 
 laws of the various states and countries in which it operates, 
 it is often necessary and always advisable to have expert 
 advice on the rights of the company and the penalties to 
 which it subjects itself for neglect or wilful disregard of 
 the law. It is customary for smaller companies to employ 
 legal counsel as conditions majr require. In man}^ cases 
 
126 MAURICE H. ROBINSON 
 
 this is miieli less expensive and not inconvenient. For the 
 larger enterprises it is, of course, almost a necessity to 
 organize a legal department which is at the service of the 
 general executive as well as of the various departments. 
 The legal department is ordinarily under the direction of a 
 general counsel who is aided hy a staff of assistants, each of 
 whom may have some special branch of the law or of the 
 company's work under his immediate care. In the case of 
 railways, public service corporations and other companies 
 having intimate relation with the public, the legal depart- 
 ment is of very great importance. 
 
 The Accounting Department. 
 
 The accounting department of any business enterprise 
 comprises three distinct fields, namely, accounting in the 
 limited sense of the word, the work of extending credit, and 
 that of making collections. In actual practice the two lat- 
 ter fields are often handled directly from the manager's of- 
 fice. It is evident, upon consideration, that the extension 
 of credit from the scientific point of view, is primarily based 
 upon accounting data and a competent credit man must first 
 be an expert accountant. This is shown by the fact that 
 whenever the credit of a business man is impaired, the ex- 
 pert accountant is at once called in and authorized to make 
 an examination of the books. Of course, other factors, such 
 as honesty, habits, etc., are taken into account, but on the 
 whole, credit is fundamentally based on the financial condi- 
 tion of the enterprise and the financial condition is shown 
 by the accounts. 
 
 In collections, the connection is not so clear. The data 
 used in the collection office is contained wholly in the ac- 
 counts. To maintain a department of collections entirely 
 distinct from the accounts necessitates two sets of accounts 
 receivable, one in the general accounts and one for the de- 
 partment of collections. By making the work of collection 
 a branch of the accounting department, such duplication is 
 
MODERN BUSINESS ORGANIZATION 127 
 
 avoided. ^Foroovor, makiiic: a rollootinn is transferring' an 
 account receivable into its cash equivalent, or in cases where 
 the full account cannot be collected, into part cash and part 
 forced discount resulting in a loss. Consequently it is in 
 accordance with recognized principles of departmental or- 
 ganization, to make collections a branch of the general ac- 
 counting department. 
 
 The Division of Accounts. 
 
 The object of accounting is to secure a record of all in- 
 dustrial operations and business transactions, mathematic- 
 ally and economically correct in form, and to present such 
 data in summarized statements showing the cost of operat- 
 ing each department and the net profits or net loss result- 
 ing from each and from the business as a whole. Account- 
 ing, then, is a necessary part of the work of all departments, 
 and hence is properly classified as one of the general depart- 
 ments of a business enterprise. 
 
 Notwithstanding its general character, it is possible to 
 conduct this work through the several departments, each 
 having its o^^Tl accounting division and each accounting di- 
 vision being entirely independent of every other. Tlius the 
 manufacturing department may keep its own books and the 
 other departments do the same. The system of department 
 accounts has certain advantages among which the more im- 
 portant are the special knowledge which each has of the 
 technical conditions of operation and consequently the bet- 
 ter adjustment of the accounts to the actual operations con- 
 ducted by them. Furthemiore, this system is, histoncally 
 speaking, the natural one and, accordingly, in those busi- 
 ness enterprises w^hich have been operating for a consider- 
 able period, the books and accounts were formerly kept in 
 accordance with this plan. 
 
 Where a company is so small as to have only one depart- 
 ment, or a few at most, with no very marked lines of sep- 
 aration among them, it is, of course, obvious that no separa- 
 
128 MAURICE H. ROBINSON 
 
 tion of the accounting would be desirable. Where the 
 enterprise is an extensive one, however, comprising many 
 departments and often many separate plants, the organi- 
 zation of the accounting work may conform to either one 
 of those types described above. While the departmental 
 system is, owing to its historic origin, more largely em- 
 ployed, still the rapid adoption of the central accounting 
 system by the more progressive corporations indicates that 
 it has, on the whole, marked advantages over the depart- 
 mental system and that such advantages are likely to se- 
 cure its general adoption in the immediate future. The 
 central accounting system has the following advantages to 
 recommend its adoption : First, it facilitates comparisons ; 
 second, it maj^, therefore, be used to enforce discipline and 
 stimulate efficiency; third, it enables the cost of production 
 to be more accurately estimated; fourth, it insures that all 
 of the accounts will be brought together and thus show the 
 results of the whole enterprise as a unit. 
 
 1. Until within the last half century, almost all business 
 enterprises were small in extent and simple in their organi- 
 zation and operation. Each enterprise was operated in 
 close competitive relationship with others of the same type. 
 Consequently, the comparison of one establishment with 
 another was easy and each proprietor and each workman, 
 by observation, was constantly making such comparisons 
 and noticing the relative standing of each enterprise. 
 With the development of business establishments with 
 many departments this method of comparison has obviously 
 become impossible. Hence, the desirability of compari- 
 sons made through the accounting department and on this 
 account the desirability of uniform methods of accounting 
 in order to make such comparisons of value. Such compari- 
 sons are, of course, particularly desirable when one com- 
 pany operates several departments of essentially the same 
 character. 
 
 2. It is obvious, of course, that maintaining discipline 
 
MODERN BUSINESS ORGANIZATION 129 
 
 and seourincc ciricicncy through the rivalry of competing 
 esta])lishiiients of the same character plays an ii]i])ortant 
 part. Wliero the competing estahlislmiciils are l)i'anches 
 of great enterprises of unlike character, such rivalry, how- 
 ever, loses force, and, consequently, there arises the ne- 
 cessity of suhstituting some other means. Of these, one 
 of the most effective is the comparison of results as sho^\Ti 
 by accounts kept on a uniform basis. This is known in 
 business enteri^nses as the "deadly parallel." The origin 
 of the system is apparently unknown. It is, however, a 
 well-known fact that the comparisons of results by means 
 of the accounts were used by the Carnegie Company with 
 man^elous results to maintain discipline and secure effi- 
 ciency, almost from the beginning of that com]')any's ex- 
 istence. Since its original adoption its main features have 
 been widely adopted by most of the larger companies and 
 by many of the smaller ones. "When the accounts are con- 
 trolled by each department it is, of course, practicable to 
 use the comparative method as between the branehes of 
 the department. But it is only where the accounts are 
 under the control of a central accounting department that 
 it is possible to compare the work of one department with 
 that of another with any degree of accuracy. 
 
 3. It is common to have three sets of records: Fii*st, 
 the cori^oratiou accounts showing the general balance sheet 
 and the general profit and loss account; second, the depart- 
 mental books showing the work of each and the corpora- 
 tion's relation with debtors and creditors; and third, a fac- 
 tory cost-accounting section under the control of the manu- 
 facturing department. The first two are usually very closely 
 connected. The latter often has no direct C(mnecti()n with 
 either of the others except as its gencu'al results are incorjio- 
 rated in the general books. The object ot* tin; cost-account- 
 ing section of the factory department is to keep a record 
 of the time of employes, of materials used, and of the cost 
 of factory superintendence. From the factory accounts, 
 
 B— II— 9 
 
130 MAURICE H. ROBINSON 
 
 the cost of manufacturing the various articles produced 
 is calculated, and to this is added what is found to be the 
 ordinary or average cost of selling the same. A third ele- 
 ment is then added, sometimes called the overhead ex- 
 penses, sometimes the burden, sometimes the indirect ex- 
 pense. This latter cost is usually figured as a percentage 
 of the manufacturing cost, and is, under the department 
 method of accounting, always more or less of a guess. 
 
 It is obvious, of course, that the cost of manufactur- 
 ing an article is the sum of several elements each of which 
 is necessary to its production and each of these elements 
 ought to be calculated on the same general system and 
 should be brought together as a sum rather than any one 
 being detemiined as a per cent of any other. When the 
 accounts are under the general control of a central account- 
 ing department this plan is not only advisable but it is 
 the natural one. The central department finds that the 
 average factory cost of manufacturing a certain article is 
 $25, that the average cost of selling the same under ordi- 
 nary conditions is $5, and that the share of the general 
 expenses of administration is $1. The total cost found by 
 independent means is then $31. This gives those in charge 
 of the price-making a reasonable basis for action, an ele- 
 ment which is largely lacking under the departmental sys- 
 tem of accounts. 
 
 4. The business success of any enterprise, whether 
 composed of one department or many distinct departments, 
 is determined by the results of the operations as a whole. 
 Where the accounts are controlled by the individual de- 
 partments, the tendency is to emphasize the success of the 
 particular departments rather than of the whole company. 
 Where the accounts are controlled by a central accounting 
 department directly under the general executive, the tend- 
 ency on the contrary is to emphasize the business enter- 
 prise as a whole and to treat each branch as a factor in a 
 co-operative enterprise whose greatest success is attained 
 
MODERN BUSINESS ORGANIZATION 131 
 
 by fiirtlicrin,^: tlie success of tlie whole organization, 
 ^foreovor, the central system assures that the accounts 
 from all branches will be brou^^^ht top^ether on a uniform 
 basis and that consequently the officers in charge will al- 
 ways have before them for their guidance the financial 
 results of the entire enterprise. 
 
 Tlie central system of accounts then mphasizes the 
 co-operative nature of the business where there are many 
 departments and assures that the department accounts will 
 be made up on the same principles and that all accounts 
 will finally be brought together into one general summary 
 showing the success or failure of the institution as a unit. 
 This result is in itself sufficiently important to justify the 
 central system of accounts. 
 
 AAliether a department of accounts should be under the 
 control of a general comptroller of accounts or of a com- 
 mittee of accounts is a question whose answer depends 
 upon the circumstances in specific cases. At the present 
 time the one-man head is quite general, although not uni- 
 vei'sal. Tlie committee system has many advantages; it 
 assures that the general system of accounts shall be com- 
 parative in character, that the technical conditions in each 
 department shall be properly considered and that the claims 
 of no one department vnll be overemphasized. "Wliere 
 the general charge of the department is in the hands of a 
 committee on accounts, it is ver^^ desirable to have the ac- 
 tual work of administration in the hands of a single exec- 
 utive who may be designated as the comptroller of accounts. 
 In the larger companies he should have one or more as- 
 sistants wnth power to act in his absence. Tlie work of the 
 department should then be divided into sections corre- 
 sponding to the organization of the company, each section 
 being under the control of an accountant directly respon- 
 sible to the comptrollpr. Thus, there would be a chief ac- 
 countant for the purchasing department, one for the man- 
 ufacturing department, one for the sales department and 
 
132 MAURICE H. ROBINSON 
 
 so on with each of the others. The accounts from the sev- 
 eral departments would then be brought together in the 
 general office on a uniform basis and show the operations 
 of the company as a whole. 
 
 The Division of Credits. 
 
 The investigations made in 1896 for the Director of the 
 Currency, and in 1910 for the National Monetary Commis- 
 sion, by Professor David Kinley, indicate that over 95 per 
 cent of all the wholesale business in the United States is 
 paid by checks and that in the retail trade about 70 per 
 cent of the sales are made in the same way. These sta- 
 tistics, while not absolutely complete for the w^hole coun- 
 try, show in a general way the importance of the credit 
 man in modern business enterprises. Credit exists wher- 
 ever an interval of time intervenes between the receipt 
 of goods, whether materials, money or services, and the 
 payment for them. To determine to whom to extend cred- 
 it, the amount of the same, and the length of time particu- 
 lar cases may properly be allowed to run, is the function 
 of the credit department of a business enterprise. The 
 credit department then, by its very nature, limits the ac- 
 tivities of the manufacturing and the sales departments 
 since its approval must be secured before any goods may 
 be sold on account. It is, moreover, in close connection 
 with the legal department, since the advice of a lawyer is 
 necessary and accounts not collectible in the ordinary way, 
 are, as a last resort, turned over to the legal department 
 for forced collection. In the granting of credit two im- 
 portant questions must be answered in the affirmative: 
 First, is the business enterprise financially able to meet 
 its obligations, including those being considered by the 
 credit department? Second, are the managers in control 
 of said enterprise desirous of meeting their obligations at 
 the specified dates'? 
 
 In order to answer the first question the credit man- 
 
MODERN BUSINESS ORGANIZATION 133 
 
 ager must bo skilled in two fields, namely, that of accouut- 
 injr and that of industrial and connncreial conditions. To 
 meet these demands Mr. nig^inl)otham in his l)ook called 
 *''riu' Makinu^ of a Merchant" suc:,t,^ests that a credit man 
 should be born a farmer's son and work up to the credit 
 office through the local bank or country store; that he 
 should supplement this experience by a period in the ac- 
 counting ofhce of the merchant or manufacturer. lie will 
 then be qualified to appreciate local conditions of the the 
 enterprise asking credit and thus detennine the consum- 
 ing capacity of its constituency; furthermore, he will be 
 trained in accounts and will know what details to ask for 
 and be a judge of the financial status of the prospective 
 customer. 
 
 The second question presents more difficulties. Indeed 
 it is impossible to answer in some cases and in most others 
 there must always remain a shadow of doubt. A man's 
 willingness to meet his just obligations is so much a matter 
 of heredity, of custom, of circumstances, that no scientific 
 basis of detennining the answer to this question has been 
 found. Hence the successful credit manager must, in addi- 
 tion to his knowledge of commercial conditions and ac- 
 counts, be an expert reader of human character and, as 
 Mr. Higginbotham further states, act in individual cases 
 on intuition, rather than upon reason. In explanation of 
 this, ^Ir. Higginbotham says: "If the case were analyzed 
 thoroughly it would be found that the intuition is but the 
 impression gained from a kind of sub-conscious reasoning." 
 This line of argument has led to the oft-repeated statement 
 that a real credit man is born, not made, as thouc^h the 
 reading of character is a peculiar gift to the few. The 
 credit man is, according to this view, one of the ** fore-or- 
 dained." The facts seem to indicate that while some men 
 may have peculiar aptitude for a credit man's work just 
 as some men take to the law, or to the ministry, any man 
 
134 MAURICE H. ROBINSON 
 
 of good capacity may be trained to judge credits as readily 
 as any other field of human activity. 
 
 In addition to the means mentioned above, namely, the 
 financial status of the applicant for credit, his character 
 and his habits, the credit man has two important sources 
 of information both of which admirably supplement the 
 work of his office. The first is the experience of other 
 houses, the second the services of mercantile agencies of 
 which Dun's and Bradstreet's are representative. 
 
 Every purchaser seeking credit is ordinarily dealing 
 with many houses and when he mshes to open credit re- 
 lations with another house the latter has a valuable source 
 of information in those companies from whom the appli- 
 cant has been purchasing on credit. It is, however, not 
 considered good taste to obtain such information from one's 
 direct competitors. This situation is unfortunate, for there 
 is no one better fitted to give such information, and in some 
 cases the dealer is engaged in handling one line of goods 
 exclusively. It has been found by experience that com- 
 petitors cannot be trusted to give their rivals uncolored 
 reports and therefore this kind of information is usually 
 sought through houses selling non-competitive goods. In 
 more recent years, however, there has been a growing tend- 
 ency to use this valuable means of information to supple- 
 ment the other sources. 
 
 The mercantile agencies are, as has been suggested, the 
 really important source of outside information. Some of 
 these agencies operate in a limited territory. Some cover 
 the ci^dlized world. Some are operated independently of 
 the business enterprises for whom they get information. 
 Some are maintained on a co-operative basis by such insti- 
 tutions. Whatever the territory or system, the mercantile 
 agency attempts to get all the facts that tend to show the 
 financial strength and the sfeneral trustworthiness of indi- 
 viduals, firms and corporations seeking credit. These agen- 
 cies publish periodically the information which they get 
 
MODERN BUSINESS ORGANIZATION 135 
 
 and in addition make special reports for their clients Tvhen- 
 evor such are desired. The mercantile agency is itself a 
 nKxst excellent illustration of business organization on an 
 innnense scale and is worthy of study from this viewpoint 
 alone. To imdertake such a study here would, however, 
 lead us too far afield. 
 
 The credit department, then, when properly organized, 
 is a branch of the accounting department and is under 
 the immediate charge of the chief credit man. Under the 
 chief credit man are assistant credit men of co-ordinate 
 authority, the number being determined by the scope of 
 the credit business. Under the assistant credit men are 
 a sufficient number of clerks and errand boys to perfonn 
 such services promptly and efficiently. 
 
 It is indispensable for the success of the credit depart- 
 ment that each of the assistant credit men have a large 
 amount of individual discretion. This is a direct result 
 of the peculiar character of the credit man's task. He 
 must, as suggested, read character, in addition to industrial 
 conditions and to accomplish this delicate task successfully 
 he must come in direct contact with the applicant for credit. 
 Moreover, he cannot transfer his thoughts or impressions 
 to his superiors. Consequently he must decide the ques- 
 tion directly rather than report to a superior for final de- 
 cision. The organization of the credit department is, there- 
 fore, exceedingly simple and the position of the credit man 
 is at once one of the most important and one of the most 
 sought for among all business openings. 
 
 The Division of Collections. 
 
 If the work of the credit department has been success- 
 fully done the collections occasion no trouble. If the re- 
 verse is true this department becomes of extreme impor- 
 tance. Hence, the intimate relationship of these two 
 branches of work in the organization of the business enter- 
 prise. It is obvious from the above considerations that the 
 
136 MAt;RICE H. ROBINSON 
 
 collection department may be either co-ordinate with the 
 credit department or a subdivision of the same. In either 
 case, however, the two must work in haiTnony for the best 
 results. In the smaller enterprise it would seem more nat- 
 ural and more economical to make the collections a part 
 of the credit division, organizing a branch for this purpose. 
 In the larger enterprise it is usual to create a division 
 of collections, either independent of the credit division 
 and directly under the general executive, or co-ordinate 
 with the same and directly under the general department 
 of accounts. The latter is more in accordance with the best 
 principles and practices of organization and for these rea- 
 sons it has been adopted in this treatise as the ideal plan. 
 The actual organization of the collection division de- 
 pends, of course, largely upon its work. In some cases the 
 collections are made through the traveling salesmen who 
 are made responsible for the amounts which they sell. This 
 method has many disadvantages and is, therefore, employed 
 only among business enterprises covering a large territory. 
 In some cases the collection department turns the accounts 
 over to an agency which collects upon a percentage basis. 
 This is a convenient plan where the accounts are scattered 
 over considerable territory and especially where the goods 
 are sold on credit through correspondence. By making 
 collections for a large number of clients at the same time 
 the expenses are greatly reduced and consequently the col- 
 lection agency is in a position to receive a suitable com- 
 pensation for its work. Wherever the accounts are suffi- 
 ciently concentrated within a limited area it is desirable 
 for each company to collect its own bills and consequently 
 to maintain a complete collection department. The greater 
 part of the work of this department consists of statements 
 sent through the mails, and the care of remittances received 
 in answer to such statements. In case of persistent neglect 
 this method is usually supplemented by personal visits 
 from the representatives of the department. When the 
 
MODERN BUSINESS ORGANIZATION 137 
 
 latter fails, forced collection through legal procedure is 
 the last resort. Every ^vell-managed esta])liHhmeut, how- 
 ever, reserves this method for the exceptional cnses and 
 tlien oidy after a tliorough investigation of the conditions 
 relating to such neglect. 
 
 The Purchasing Department. 
 
 The importance of the i)urchasing department vaiies 
 with the nature of the husiness and with the extent to 
 which the process of integration has been carried. A mer- 
 cantile establishment ordinarily purchases all of the goods 
 which it sells, and consequently its purchasing department 
 is of equal importance with that of sales. In a manufac- 
 turing enterprise the situation is quite different. Some 
 manufacturers own their own mines, forests, quarries, and 
 other raw materials, and in such cases the purchasing de- 
 partment is of minor importance, if it exists at all. In 
 most cases, however, manufacturing enterprises jjurchase 
 the larger projDortion of their materials in the open market, 
 and under such circmnstances the purchasing department 
 is of the utmost importance to the success of the company. 
 For the United States as a whole it was shown by the 
 Census of 1900 that for every dollar received for the sale 
 of products, the manufacturers as a class paid out for ma- 
 tei-ials approximately 55 cents, or somewhere over t^^'ice 
 the amount which was paid for wages. 
 
 The work of the purchasing department of a manufac- 
 turing company naturally divides into three branches: 
 First, raw materials and partially finished products; sec- 
 ond, finislied materials for the extension or improvement 
 of buildings and machinery; and third, current su])plics. 
 On account of this natural division, it is often customary 
 to give the purchasing department authority over the last 
 division only, while the manufacturing department pur- 
 chases its raw materials directly and the general executive 
 has charge of all purchases for new buildings or new ma- 
 
138 MAURICE H. ROBINSON 
 
 chinery. In such cases the purchasing bureau of the manu- 
 facturing department is in reality the most important 
 branch of the purchasing division. This system is being 
 rapidly superseded by the installation of a general purchas- 
 ing department, responsible to the chief executive. 
 
 The purchasing department is usually under the con- 
 trol of a general purchasing agent, assisted by deputy pur- 
 chasing agents for the several branches above mentioned. 
 In addition to the purchases, this department often has 
 charge of the storage of the goods purchased until they 
 are wanted by the factory or the sales room. In such cases 
 the stores division of the purchasing department is under 
 the control of a chief stores clerk, or stores manager, who 
 receives goods from the purchasing department, and holds 
 them until they are issued to the several departments upon 
 requisitions properly authorized by the departments which 
 receive them. 
 
 The purchasing department has two special duties: 
 First, to purchase goods only upon proper authorization; 
 and second, to make such purchases on the most advanta- 
 geous terms. The importance of the first of these duties 
 is often overlooked. Each department of a company is 
 especially interested in its own wants; consequently, when 
 a department purchases for itself, the volume of its wants 
 is likely to be overestimated. Furthermore, the depart- 
 ment system of purchasing facilitates graft and fraud in 
 at least two ways: The department officers may purchase 
 materials and use the same for their own private purposes; 
 or they may purchase the goods of other enterprises in 
 which they are personally interested at excessive prices, 
 thus bleeding the company by whom they are employed for 
 the sake of dividing among themselves the illegal gains. 
 The introduction of the general purchasing agent has tend- 
 ed to check unnecessary purchases and to make this spe- 
 cies of graft generally impracticable. When requisitions 
 for materials and supplies are required to go through the 
 
MODERN BUSINESS ORGANIZATION 139 
 
 general purcliasinc: agent's office, the departments are not 
 only more earefnl in making sneli requisitions, l)nt are 
 likely to he held up if their requisitions are uiireasonahle 
 in quantity, or quality, and, moreover, unless the purchas- 
 ing agent is in collusion with the heads of the several de- 
 partments, he has no personal motive to purchase from the 
 companies in which such heads are interested, and there- 
 fore, he is not likely to favor such practices. 
 
 It will be suggested, however, that the purchasing agent 
 may himself be a grafter and use his position to place con- 
 tracts and purchase supplies with companies willing to 
 share the graft with him. Tlie practical difficulties involved 
 in this method of securing illegal gains are, however, so 
 great as to prevent its general use. In this case the depart- 
 ment heads find the business of their departments grow- 
 ing less and less profitable while at the same time they have 
 no opportunity to share in the profits arising from the con- 
 tracts made by the purchasing department. Accordingly, 
 on account of the poor showing which they are making, 
 they find their salaries are likely to be cut by the general 
 executive, or they may be discharged altogether. It is 
 therefore for their personal advantage to keep in close 
 touch with the work of the purchasing department and 
 to notify the general executive when it seems probable 
 that the purchases are being fraudulently made. Tliis 
 check upon graft is supplemented by the work of the cen- 
 tral accounting department, through whose office all pur- 
 chases must go. Wliile it is not to be supposed that the 
 accounting department is to act chiefly as a detective, it 
 is one of its duties to see that all purchases are regularly 
 made and the prices attached are reasonable and fair. 
 
 The general purchasing department is especially impor- 
 tant in the case of those business enterprises that have 
 plants located at several different points or have branches 
 which use the same kind of materials. Under such cir- 
 cumstances the general purchasing department is in a po- 
 
140 MAURICE H. ROBINSON 
 
 sition to combine the orders of all of the plants or all of 
 the branches and thus not only to secure better terms, but 
 also to save appreciably on the cost of transportation. This 
 saving is of so much importance that retail stores handling 
 the same kind of goods and located in the same general 
 section of the country find it of advantage to combine their 
 several purchasing departments into one general purchas- 
 ing agency. Sometimes this is accomplished through the? 
 controlling interest of some one man, as the Besse Fur- 
 nishing Goods Stores in southern New England, and some- 
 times the organization takes the form of a corporation in 
 which the several stores hold stock in proportion to their 
 annual purchasing power, as the New York Mercantile 
 Company, operating in connection with the purchasing de- 
 partments of a group of stores located in the North Central 
 States. Whatever the form, the centralization of the pur- 
 chases of the several branches of the same company or of 
 several business enterprises is for the purpose of buying 
 the goods at lower rates or on more advantageous terms. 
 The work of the purchasing department requires the 
 union of two elements or two kinds of skill not commonly 
 found in any one man, namely, an extensive experience 
 and knowledge of markets and prices, and also an intimate 
 knowledge of raw materials, of the processes of manufac- 
 turing, and of finished goods. Owing to the peculiar de- 
 mands upon the purchasing department, it is usual in large 
 enterprises to divide it into bureaus or branches, each of 
 which has charge of the purchasing of some one kind of ma- 
 terials or of goods. At the head of each of these bureaus is 
 a head buyer, with a sufficient corps of assistant buyers to 
 carry on the work of the office. This gives opportunity for 
 individuals having a special technical training to use their 
 knowledge of materials and prices to the best advantage. 
 It then becomes the special function of the general pur- 
 chasing agent's office to direct the activities of the buyers 
 m regard to market conditions and prices while special 
 
MODERN BUSINESS ORGANIZATION 141 
 
 buyers give special attention to tlie qualities of the goods 
 which they are purchasing. 
 
 The Ore and Coal Department. 
 
 The ore and coal department of an extensive manufac- 
 turing enterprise resembles an independent mining com- 
 pany except in the following points: First, it is under the 
 control of the general executive; and second, it does not 
 ordinarily sell its products to a general market, but fur- 
 nishes them on orders from the manufacturing department. 
 Consequently the head of this department is directly re- 
 sponsible to the executive committee or the president, and 
 therefore is occupied with the technical work of opera- 
 ting the mines rather than with formulating the business 
 policy of the department. It is therefore desirable that 
 the manager of this department should be an expert on 
 mining operations and that his assistants should have the 
 same general training. Second, since the ore and coal de- 
 partment does not sell its products, it requires no selling 
 bureau. Furthei-more, its accounts are taken care of by 
 the general accounting department. Its only purchases are 
 supplies, and these are bought through the general pur- 
 chasing department, hence the organization of this division 
 is detemiined almost entirely by operating conditions. 
 Tliis simplifies the problem and permits the em]ihasis to 
 be laid uj^on technical efficiency rather than upon business 
 ability. 
 
 In turning over the materials to the manufacturing de- 
 partment, two methods of charging for the same are in 
 general use. The first method is to charge the cost of the 
 materials or as near the cost as can be conveniently ascer- 
 tained. The second method is to charge the market price. 
 In the first case the operation of the coal and ore depart- 
 ment will show neither a profit nor a loss. Tlie accounts 
 will, however, always show the average cost of jDroduction. 
 
142 MAURICE H. ROBINSON 
 
 This is, of course, liigWy desirable, but such computations 
 can be provided for under the second system. The ]atter 
 has the advantage of sho\Ying the financial status of its 
 department as it would appear were it an individual busi- 
 ness establishment, and thus has the effect of stimulating 
 the general manager and his assistants to show an actual 
 profit at the end of each season. In this way the depart- 
 ment has the appearance of being independent although 
 really under the control of the general executive. 
 
 "Whether a manufacturing company ought to own its 
 own mines and forests and thus supply directly the raw 
 material which it uses is a question of business manage- 
 ment that admits of an answer only in specific cases. For 
 a small manufacturing establishment to own and operate 
 such subsidiary companies is ordinarily impracticable. 
 For the larger enterprises, however, the ownership of the 
 raw materials often has many advantages. In the first 
 place, the manufacturers are thus able to get the materials 
 at cost; second, they are able to get them when they want 
 them and in the proper quantities; third, they may thus 
 prevent the monopolization of certain raw materials and 
 hence assure themselves of a supply at a reasonable price; 
 fourth, they may thus avoid the necessity of an expensive 
 purchasing department, since their materials are furnished 
 upon orders to the departments furnishing such supplies. 
 
 These and other advantages which occur in specific cases 
 have been sufficiently important to induce the larger iron 
 and steel mills, some of the railroads, manufacturers of 
 furniture, matches, and other lines, to purchase mines and 
 forests with sufficient capacity to supply a considerable 
 part of their needs. Some retailers of clothing also manu- 
 facture their own goods, although this method has not been 
 so generally successful as has been the case in the iron, 
 steel, coal, and lumber business. 
 
MODERN BUSINESS ORGANIZATION 143 
 
 The Manufacturing Department. 
 
 Under tlie most highly organized form of business ad- 
 ministration the manufacturing department is assigned a 
 ]')i'oi)orly located, well-arranged, sufficiently lighted factory. 
 This building is equipped with the best machiner}^ obtain- 
 able and the general sujDerintendent is authorized to em- 
 ploy a sufficient number of assistants and w^orkmen to carry 
 on the processes with the utmost efficiency. The legal de- 
 partment fui*nishes advice on matters of law whenever 
 necessary, the books are under the direction of the account- 
 ing department, the goods are bought through the pur- 
 chasing department, and are sold through the sales de- 
 partment. The work of the manufacturing department is 
 thus exclusively technical in character and is entirely sepa- 
 rated from the business or commercial activities of the 
 company. Its organization, therefore, may be developed 
 upon strictly scientific lines, based upon the character of 
 the products manufactured, and planned with the single 
 jDurpose of securing the greatest possible efficiency in pro- 
 duction. The branches of this department will, of course, 
 vaiy greatly in detail, but nevertheless all possess certain 
 features in common which makes a general summary of 
 this branch of the organization possible. 
 
 1. The manufacturing department of any company is 
 usually under the direction of a general superintendent, 
 directly responsible to the central executive authority. 
 Since his duties and responsil)ilities are confined to the 
 work of manufacturing, his ciualifications must be deter- 
 mined by the kind of goods which is produced. Thus, 
 a company manufacturing chemical materials and prepara- 
 tions requires the ser^nces of an expert chemist as super- 
 intendent: a company manufacturing furniture, an expert 
 cabinet-maker; a company making books, an experienced 
 printer and book-binder. These technical qualifications 
 while necessaiy are, however, not sufficient. The efficiency 
 
144 MAURICE H. ROBINSON 
 
 of the factory must always depend largely iipon tlie or- 
 ganizing ability of the superintendent, and consequently 
 this officer must in addition to his technical qualifications 
 possess at least in average measure the second qualifica- 
 tion. Technical ability in the special field of manufactur- 
 ing undertaken by the enterprise and a fair degree, at least, 
 of the organizer's genius are the two indispensable quali- 
 fications of the factory superintendent. 
 
 As a technical expert, the superintendent should per- 
 sonally or through his immediate office force take direct 
 charge of the following matters: The inspection of pro- 
 cesses and goods in the process of manufacture; methods 
 and means of stimulating efficiency; the general oversight 
 of tools and machinery; the care of supplies and materials; 
 as the authority in direct charge of the shop organization, 
 he should have supervision of the time-keeping system 
 and the allotment of work to the several branches of his 
 department; the wage sj^stem and the stimulation of effi- 
 ciency among the various sections of the factory; the main- 
 tenance of discipline; the sanitary conditions of the fac- 
 tory; and the inter-relationship of the various branches; 
 in short, the superintendent is obliged to take direct and 
 personal charge of all matters which cannot be convenient- 
 ly managed through the sub-divisions of his organization. 
 On the other hand, the superintendent, especially in the 
 larger organizations, is compelled to entrust to subordinate 
 organizations all functions which are specifically within the 
 field which they individually occupy. 
 
 2. Every manufacturing department except the most 
 simple in character may ordinarily with very great ad- 
 vantage be sub-divided into branches or sections, and in 
 such cases some or all of the following divisions will be 
 found necessary, and all will usually be found desirable: 
 
 (1) The testing and experimental laboratory. 
 
 (2) The designing and drafting room. 
 
 J 
 
MODERN BUSINESS ORGANIZATION 145 
 
 (3) The power i)laut. 
 
 (4) Tlio tool room 
 
 (5) The shop. 
 
 (1) The Testing and Experimental Laboratory is a di- 
 rect outc^rowth of the ai)plication of scientilie methods to 
 the practical art of manufacturing. On this account it 
 is a recent development, and consequently is just begin- 
 ning to make its influence felt. The function of this divi- 
 sion of the manufacturing department is to test materials 
 for strength and dural)ility under various conditions and 
 thus to determine in advance of use their adaptability for 
 specific purposes. For example, in the erection of a thirty- 
 story business block the load which a given beam must 
 carry may be determined by mathematical j^rocesses. In 
 the testing laboratory it is easy to find whether a steel 
 beam of a particular quality and structure will bear the 
 burden which is to be imposed upon it. In this way manu- 
 facturers are able to guarantee their work, thus promot- 
 ing their own business success at the same time tliat they 
 are i^rotecting the interests of society as a whole. In the 
 same way the durability of wire rope, of hemp cordage, 
 of steel and iron rails, of natural and prepared wood for 
 railroad ties, of brick and pavement of all kinds, are tested 
 and their wearing qualities ascertained in advance of their 
 manufacture on a large scale. The usefulness of the labo- 
 ratoi-y in the newer fields of manufacture, as, for example, 
 electricity and chemistry, can hardly be overestimated. 
 In many cases scientific institutions and expert scientists 
 have led the way, but in practically all cases manufactur- 
 ers undertaking the newer fields of business enterprise are 
 practically forced to establish and maintain a testing and 
 experimental laboratory in tlieir own works. 
 
 This division should l)e under the immediate direction 
 of an expert in this particular kind of work, and he should 
 be aided by a sufficient number of trained assistants to 
 
 B — II— 10 
 
146 MAURICE H. ROBINSON 
 
 properly conduct the tests and experiments. It is obvious 
 that he must possess a considerable degree of liberty in 
 regard to the methods employed, and that the laboratory 
 must be supplied with the best equipment that the market 
 affords. 
 
 (2) The Designing and Drafting Room. This branch of 
 the shop organization is necessary in all manufacturing 
 plants where plans or models are required. It is under 
 the direction of a chief draftsman, directly responsible to 
 the superintendent. The chief draftsman is assisted by a 
 sufficient number of subordinates to supply all drawings, 
 sketches, blue prints, and other working designs for fac- 
 tory use. This division should also provide for the storage 
 of all patterns and designs and arrange them in a methodi- 
 cal way so that they will be readily accessible whenever 
 they are wanted for use. 
 
 (3) The Power Plant. Manufacturing establishments 
 usually find it desirable to furnish the power which they 
 use in the shops through their own power plant. In all 
 such cases the work of providing power is properly sepa- 
 rated from the rest of the factory organization and en- 
 trusted to a separate division. The power plant is then 
 placed under the direction of a mechanical engineer, who 
 is often designated by the title of assistant superintendent. 
 He, with his assistants, has charge of the boilers, pumps, 
 engines, generators, motors, etc., used for moving appa- 
 ratus and propelling machinery. This division has imme- 
 diate charge of all engineers, firemen, oilers, watchmen, and 
 is expected to see that the machinery is kept in running 
 order and that power is furnished to the departments when- 
 ever wanted. The supplies for this division are obtained 
 from the store room upon requisition from the superin- 
 tendent's office. The chief mechanical engineer not only 
 supervises the operation of the power plant, but in the 
 well-managed establishment is expected to suggest im- 
 provements in design, more economical methods of furnish- 
 
MODERN BUSINESS ORGANIZATION 147 
 
 ing power, and in case of extensions and improvements 
 to supervise the plans for the erection of additions to the 
 plant. He thus occupies an extremely responsible position, 
 and should be able to provide power at the least possible 
 cost under the particular circumstances in which the fac- 
 tory is working. 
 
 (4) The Tool Room. Everj^ business enteri^rise operat- 
 ing a factory uses a variety of tools and it has been found 
 economical to organize a branch to provide tools, store them 
 in convenient rooms when not in use, and issue them on 
 requisitions for particular shops and on particular jobs. 
 Tlie tool room is usually under the direct charge of a fore- 
 man, reporting directly to the assistant superintendent in 
 charge of the power plant and tool room. This arrange- 
 ment is a convenient one in small companies, but in large 
 ones the tool room is of sufficient imjDortance to be inde- 
 pendent of any other branch of the manufacturing and 
 should therefore be a separate division, directly under the 
 general superintendent. 
 
 In issuing tools, it is necessary to specify with con- 
 siderable accuracy the job for which the tools are to be 
 used, in order that the tool expense of the company may 
 be properly apportioned to the various jobs and thus en- 
 able the accounting department to calculate accurately the 
 cost of making any particular piece of work. Where tools, 
 dies, etc., are made especially for use on the particular job 
 and have no prospective future use, the total expense of 
 the same should be charged to the job for which they were 
 made. In other cases, the time in use on each job should 
 be kept and the charge for the tools be made on the basis 
 of their normal life. 
 
 (5) The Shop. The number of shops and the size and 
 arrangements of each are matters that are governed by 
 the nature of the work and the character of the enterprise. 
 Each shop is, however, devoted to one particular kind of 
 work and is almost universally under the immediate charge 
 
148 MAURICE H. ROBINSON 
 
 of a foreman, reporting directly to the superintendent, or 
 in some establishments to an assistant superintendent 
 whose especial duty it is to supervise the work of the shop 
 division. 
 
 The foreman must, it is obvious, be a man skilled in 
 the technical side of the work of his shop. He should know 
 how much work an employe working at a fair rate of speed 
 is able to accomplish in a given time, and be able to secure 
 the best work of which his men are capable. He must also 
 see that the jobs are properly apportioned so that the men, 
 tools, and machinery are kept regularly employed. It is 
 also the duty of the foreman to see that the time slips are 
 properly checked and thus assist the accounting depart- 
 ment in its efforts to determine the actual cost of manu- 
 facturing each of the various articles which are being 
 turned out. 
 
 The foremen are assisted by the bosses, who are imme- 
 diately above the workmen and in some cases take part in 
 actual manual labor. The bosses are divided into two main 
 classes — those having charge of particular kinds of 
 work, as the washing boss or the riveting boss, and those 
 having charge of particular shops, called job bosses. In 
 addition it is sometimes found desirable to sub-divide the 
 duties still further and appoint a man called the speed boss, 
 to see that the machines are run at proper speed, and an- 
 other called the inspection boss, to see that the work in 
 process is of standard quality. 
 
 Finally, in each of the shops are the workmen, who, 
 under the direction of the foremen and bosses, take the ma- 
 terials, use the tools and machinery, and turn out the 
 finished product in conformity with the designs and plans 
 prepared in the drafting room. Each laborer in a well- 
 organized shop has a specific task to do and it is the func- 
 tion of the general authorities to see that the workmen 
 are not only skilled in their particular work, but that each 
 department and each branch has its proper allotment, so 
 
MODERN BUSINESS ORGANIZATION 149 
 
 that aP arc kept unil'onuly employed and no dei)artnient 
 is ()])lin:ed to "svait, owinix to the failure of the ]ir('C('(lin£f 
 department to get its work out on time. In addition to the 
 skilled laborers, who cannot readily he shifted from one 
 kind of work to another, there is always a group of gen- 
 eral laborers, or utility men, who assist in the non-technical 
 work wherever needed. 
 
 The Sales Department. 
 
 The sales department is that branch of a business en- 
 terprise through which the goods are marketed. It there- 
 fore includes the following branches: 
 
 (1) Advertising. (3) Selling. 
 
 (2) Estimating. (4) Ordering. 
 
 Tlie sales department as a whole may be under the 
 immediate control of either the general sales agent or a 
 sales committee, responsible in their turn directly to the 
 general executive. The single head in the person of a gen- 
 eral sales agent is the usual form. As stated in connec- 
 tion with certain other departments, the conunittee sys- 
 tem has been meeting with most excellent results in many 
 lines of business during the past decade. AMiether the 
 single head or the committee system is used, each of the 
 four branches should be organized by itself and have its 
 own official staff. We shall now consider each of these in 
 their order. 
 
 (1) Advertising. The advertising division includes all 
 of the means thrctugh which the business enterpi-ise seeks 
 to retain and extend its market. The work is under the 
 immediate direction of an advertising manager, aided in 
 the larger companies by assistant managers, each having 
 charge of some important branch of the business. In the 
 ^liddle Ages advertising was conducted chiefly through the 
 display of goods and wares at fairs and in the market 
 places. This method is still of great imiDortance, as is 
 
150 MAURICE H. ROBINSON 
 
 shown by the international expositions, the national food, 
 stock, and land shows, and the local fairs at which the 
 manufacturers and merchants display their goods. In mod- 
 em times the fairs have taken a secondary place and the 
 really important methods are either personal solicitation 
 or display advertising through letters, circulars, posters, 
 window dressing, and periodical literature. Under the 
 first head is included all methods by which the seller at- 
 tempts to reach the buyer by personal exploitation. In 
 this division the traveling salesman is easily the most im- 
 portant. The demonstration of foods and wares, though 
 of lesser value, is in the case of new commodities one of 
 the best avenues through which the consumer is reached. 
 Finally we have the free distribution of samples through 
 personal visitations. 
 
 In all of these cases the attempt is made to reach the 
 purchaser directly and influence him to buy a specific class 
 of goods or a specific article. There is thus danger of eco- 
 nomic loss from two sources: First, much time is wasted in 
 seeking those who really want the goods; and second, ow- 
 ing to the direct personal contact, the retailer is often load- 
 ed down with goods which he cannot sell and the ultimate 
 consumer, with goods which he cannot use. For these rea- 
 sons, there has been a decided tendency in recent years to 
 employ display advertising wherever such means of pub- 
 licity are adaptea to the particular case in hand. The ob- 
 ject of display advertising is to create a general demand 
 for the goods, and consequently this form appeals particu- 
 larly to the manufacturer, who is thus rendered partially 
 independent of the middleman in the selling of his prod- 
 ucts. To strengthen their position in connection with this 
 kind of advertising, manufacturers adopt trade-marks and 
 trade names and thus establish a species of good-will some- 
 what akin to that which is attached to a merchant's good 
 name. 
 
 Display advertising is often very general in character 
 
MODERN BUSINESS ORGANIZATION 151 
 
 callinc: attention to tlie quality of tlic goods, but omitting 
 any reference to the place Avhere tlicy may be obtained. 
 Such advertising is, of course, used chiefly by the manu- 
 facturers. In other cases, specific articles are named, the 
 prices are given, and the place where they may be obtained 
 is noted. This foiTti of display advertising is used chiefly 
 by retailers of all classes. 
 
 Display advertising employs either the press, the circu- 
 lar, and the catalog, or out-door signs of various kinds. 
 In the first class are found the daily and weekly newspaper, 
 the monthly magazine, the trade journal and periodicals 
 covering a special field, such, as those devoted to out-door 
 life or athletic sports. In the second class is the ordinary 
 circular, the almanac, the calendar, and the regular trade 
 catalogs. In the mail-order business the catalog is, of 
 course, indisj^ensable, while in all fields it is of growing 
 importance as a result of the tendency to standardize the 
 quality and design of goods. In the third class there are 
 sign boards, posters, electric signs, and street car displays. 
 Tlie value of the methods included in this class depends 
 largely upon the density of the population and the charac- 
 teristics of the purchasing public. In a highly educated 
 community the out-door sign is largely thrown away. The 
 same is true of the poster and street-car advertisement. 
 The electric sign often fails for the same reason, although 
 it usually has the merit of directing the purchaser to the 
 place where the article wanted may be found. 
 
 Tlie function of the advertising manager is first, to 
 choose the media through which the purchaser is to be 
 reached; second, to outline the plan of campaign; third, 
 to organize and direct his assistants in their work; and 
 finally, to trace the relationship between the advertising 
 and its results in actual or prospective customers. 
 
 (a) In the choice of a medium, the advertising manager 
 should be guided by the kind of goods which he wishes to 
 sell and the character of the constituency to which he ai> 
 
152 MAURICE H. ROBINSON 
 
 peals. In connection with tlie first of these conditions he 
 may easily consult the technical expert, whose advice will 
 enable him to call attention to the mechanical perfection 
 of the articles he is advertising. For the second he must 
 rely upon his knowledge of sociological conditions, and in 
 most cases he must be guided chiefly by experience. Hav- 
 ing determined the above points, he is in a position to choose 
 the medium, whether circular, poster, electric sign, period- 
 ical, one or all. When the most general appeal to the pub- 
 lic is desired, all media may be selected. Where the appeal 
 is made to a particular class, a technical or special journal 
 will usually be found most appropriate. 
 
 (b) The campaign may be either short and striking or 
 long and persistent, depending again largely upon the char- 
 acter of the goods to be sold. Where the goods are to be 
 regularly manufactured for a long period, it is obvious that 
 either plan may be adopted. AMiere they are sold once for 
 all, there is no alternative — the former must be chosen. 
 This accounts for the nature of the advertising in connec- 
 tion with the sale of certain issues of stock, especially where 
 the promotion of the enteri3rise is characterized by ques- 
 tionable practices. The policj^ of continuous advertising 
 is much more in accordance with the teachings of both 
 sociology and psychology. It is the continual dripping that 
 wears away the stone, and it is the constant and unremit- 
 ted advertising of 's Soap and 's Clothes that 
 
 attracts the attention of the purchaser to their merits. In 
 many cases it has been found by actual experience that 
 the purchasing public ceases to buy almost immediately 
 after the advertisements are withdrawn. It is often true 
 that continual advertising is the price of business success. 
 
 (c) The number of assistant managers and of clerks 
 in th3 advertising manager's office depends entirely upon 
 the nature of the campaign, and is likely to vary somewhat 
 from season to season. For this reason many business en- 
 terprises find it desirable to employ an advertising man- 
 
MODERN BUSINESS ORGANIZATION 153 
 
 a^er only and contract ont the advertising thronj^li one of 
 the many regnhir advertisinc^ agencies that ai-e at their 
 service. Since the advertising of different manufacturers 
 and merchants varies from season to season, tlic advertis- 
 ing agency is in a position to keep its force regidarly em- 
 ployed througliout the entire year. In this way it is often 
 an economy to employ the advertising agency rather than 
 to maintain one. Moreover, the wide experience of the 
 advertising agency in promoting the sale of other classes 
 of goods is at the service of the manufacturer employing 
 this means of securing publicity. Again, the advertising 
 agency regularly contracts for a given amount of space in 
 various periodicals, on the billboards, and in the various 
 street cars, and tlierefore by subletting the space to va- 
 rious advertisers as their needs demand, it secures an addi- 
 tional saving. Wherever the advertising is conducted 
 through circulars and catalogs, there is usually a saving to 
 have the work done in the advertising dei)artment rather 
 than through the agency. 
 
 (d) To determine the results of the advertising in actual 
 sales is no easy matter in any case, and impossi])le in 
 certain cases. The process by which such results are esti- 
 mated is called ** keying." While the methods of keying 
 differ, they are all alike in one point, namely, in their at- 
 tempt to coiTelate the answers to advertisements with ])ar- 
 ticular media. In some cases this is accomplished 1)y gi\ing 
 different addresses in different periodicals for the same ad- 
 vertisement. In others, all those who reply to a certain ad- 
 vertisement are required to address Department A, B, etc. 
 In others, a coupon is provided which the prospective cus- 
 tomer is required to cut out, sign, and return. The pe- 
 riodicals usually assist the keying of advertisements by re- 
 questing their readers to mention their name in replying to 
 the advertisements appearing in their columns. Wlierever 
 the advertising manager uses only one method of advertis- 
 ing and the goods are new, the results of his campaign are 
 
154 MAURICE H. ROBINSON 
 
 readily ascertained. As the campaign progresses it is, of 
 course, plain that a considerable portion of the sales come 
 from the recommendations of satisfied customers. The 
 greater the number of media, the greater the difficulty of 
 tracing the relationship which actually exists between ad- 
 vertising and sales. 
 
 Where the appeal is made in a general way, it is obvi- 
 ously impossible to ascertain anything more than the rela- 
 tionship of the money expended in the campaign to the 
 general results in increased sales, and whenever business 
 conditions are fluctuating on account of general commercial 
 conditions, this relationship must be corrected for errors 
 due to this particular cause. 
 
 (2) Estimating. This branch of the sales depart- 
 ment is necessary only where goods of various kinds and 
 qualities are made to order. It therefore has no regular 
 place in commercial houses and in those manufacturing es- 
 tablishments where the goods made are of standard design 
 for the general trade. Where goods of special design are 
 made to order, the bureau of estimates cannot be dispensed 
 with. Its purpose is to determine in advance the ap- 
 proximate cost of making a particular kind of goods, vary- 
 ing in character from a specially designed gas engine to a 
 thirty-story office building in one of the great cities. The 
 cost thus ascertained is used for the purpose of making the 
 price, and hence the bureau of estimates is, in the case of 
 manufacturers producing goods of special design, one of 
 the important branches of its work and organization. An 
 incompetent or careless bureau of estimates is in a position 
 to wreck an enterprise in which all other departments and 
 branches are efficiently organized and ably managed. A 
 properly conducted bureau of estimates will, on the con- 
 trary, prevent the wreck of a company, and provided thei 
 other departments are wisely operated, will insure its suc- 
 cess. 
 
 It is evident from the nature of the work that the bureau 
 
MODERN BUSINESS ORGANIZATION 155 
 
 of estimates demands from its official staff traininj]^ in two 
 separate fields of knowledGfe: First, in enc^ineennpf, and 
 second, in accountancy. Tlie first of these two require- 
 ments is generally recognized. It is admitted that a man 
 must have an engineer's knowledge of materials and con- 
 struction to estimate even ajoproximately the cost of build- 
 ing a gas engine or a locomotive. It is not so generally rec- 
 ognized that the second qualification is equally impera- 
 tive, and yet unless one admits the truth of the second 
 proposition, he must logically affii*m that the proper train- 
 ing for the chief accountant of such an enterprise as the 
 United States Steel Corporation is that of the engineer. 
 The cost of constructing an engine is not merely the mate- 
 rials and the time directly employed, but a proportion of all 
 the imdivided and unassigned expenses, and therefore the 
 accountant's training is necessary in the bureau of esti- 
 mates. 
 
 It is, of course, obvious that the data gathered by the 
 engineers may be referred to the accounting department 
 for arrangement. Such a process would enable the bureau 
 of estimates to make accurate calculations. This method 
 would in many cases occasion delay and serve to sub-divide 
 the responsibility among the separate departments. On 
 the whole, therefore, it would seem to be better business 
 policy to imite in the bureau of estimates the two qualifica- 
 tions by separating it into two branches and placing at tlie 
 head of the one an expert engineer and at the head of the 
 other an expert accountant. The head of the bureau of 
 estimates should, of course, be an expert in one and have 
 a work in 2" knowledge of the other field. 
 
 (3) Selling the Goods. The goods produced in the fac- 
 tory are sold either to the middleman or to the retailer or 
 directly to the consumer. In the first case, the middleman 
 may be a broker, a commission man, or a wholesaler. In 
 the second case, he may be a general stores man, or a spe- 
 
156 MAURICE H. ROBINSON 
 
 cialist. In the third case, he may be one of a select class or 
 one of the general public. 
 
 (1) The Brokerage Sj^stem. The broker is an interme- 
 diary between the large manufacturer and the wholesaler or 
 the large retailer. He receives a small commission for his; 
 services, the contract being between the manufacturer and 
 the middleman. The broker is an important factor in the 
 sale of securities and of certain lines of goods capable of 
 fine gradations. The print cloths of Fall River are sold in 
 this way and certain kinds of grain on the various Boards 
 of Trade. The brokerage Sfrgtem of selling simplifies the 
 sales organization by bringing the buyers and the sellers in 
 direct communication in a central exchange. 
 
 (2) The Commission Plan. The commission house is, 
 like the broker, an intermediary, but differs in one im- 
 portant respect, namely, it sells directly to the wholesaler 
 and sometimes to the retailer, advancing a part of the price, 
 guaranteeing the payments, making the collections, and re- 
 ceiving a somewhat larger commission than the broker. 
 The manufacturer who sells through the commission house, 
 as in the previous case, needs only a simple selling organ- 
 ization. 
 
 (3) The Selling Company. A modification of the com- 
 mission plan of selling which seems to be of growing im- 
 portance has developed in recent years. It consists in the 
 formation of a separate corporation entirely distinct in its 
 operations, and yet under the control of the manufacturing 
 company or companies which organize it. The control is 
 effected usually through what is known as the community of 
 interests plan, although in some cases the stock is owned 
 directly by the manufacturing corporation. 
 
 The community of interests plan, that is, control through 
 ownership of the majority of the stock of two- or more com- 
 panies by the same group of men, has been employed for 
 years with satisfactory results by the Fairbanks scale man- 
 ufacturers. The manufacturing company was instrumen- 
 
MODERN BUSINESS ORGANIZATION 157 
 
 tal in foniiinc: two solliii,i;- oompanios, nnmoly, tlio FaiT-bnTiks 
 Company, with headquarters in New York, and the Cana- 
 dian Fairbanks Company of ^lontreal, Canada. The innn- 
 cv controls the territory east of Cleveland and north of the 
 Ohio River, the State of Texas, and all foreign territory ex- 
 cept Canada. Tlie latter has the exclusive nc^ht of soiling 
 in Canada. In addition to these companies, tlie Fairl)anks 
 ]\fanufacturing Company sells through Fair])anks Morse 
 and Company, an allied corporation, in all territory in the 
 United States not controlled by the Fairbanks Company of 
 New York. All goods manufactured arc turned over to 
 the three selling comioanios to be sold on a percentage basis. 
 In this way the manufacturing company is relieved of the 
 necessity of organizing and operating a selling branch. The 
 same method was adopted by the smelting trust and some of 
 the other mining companies about ten yaws ago, through 
 the organization of the United Metals Selling Company. 
 During the past decade some of the insurance companies 
 have employed the same means of selling insurance, the 
 purpose being partly to escape certain regulations consid- 
 ered ])urdensome and i)artly to enable the organizers to par- 
 ticipate in the jorofits expected from the selling contracts. 
 Selling through a commission house has certain advan- 
 tages which are likely to render it a pemianent feature of 
 business organization. In the first place, the connnission 
 house is in a position to sell many lines of goods through 
 one organization and thus save unnecessary expense. Sec- 
 ond, the commission man becomes an expert in his particu- 
 lar field. Third, owing to trans])ortation and trade condi- 
 tions, the commission men naturally congregate togctlier 
 and thus concentrate the selling of certain lines of goods in 
 a certain territory, consequently economizing the time of 
 the buyers. Fourth, as a result of this kind of concentra- 
 tion an excliange naturally develo})s, as tlic fruit and i)ro- 
 duce exchanges, the metal exchanges, and the like. An 
 
158 MAURICE H. ROBINSON 
 
 exchange is, of course, a great saving to both buyer and 
 seller. 
 
 The second method of selling on commission, namely, 
 through a separately organized company under the control 
 of the manufacturing company, is open to serious criticism, 
 especially where only a part of the stock is owned directly 
 by the parent company, and this for two reasons. First, the 
 selling company cannot properly undertake to sell com- 
 peting goods and it would not ordinarily be desirable to 
 handle different lines of goods. This results in the de- 
 velopment of a selling organization for every separate 
 manufacturer's goods, thus unnecessarily increasing the 
 cost of selling. Second, unless the interests of the sell- 
 ing company and of the manufacturing company are iden- 
 tical, through a common ownership or the ownership of 
 the one by the other, the selling contract is likely to un- 
 duly favor the selling company. This results from the 
 following conditions. The selling company having no 
 large permanent investment can go out of business at any 
 time on short notice; the manufacturing company cannot 
 thus withdraw from business without great loss. The 
 selling company is in direct contact with the trade; the 
 manufacturing company is not. Consequently, the rate 
 of commission is likely to favor the selling organization, 
 thus increasing its profits at the expense of the manu- 
 facturing company. This method of selling is particular- 
 ly liable to abuse where, as is often the case, the officers 
 and some of the directors are the principal owners of the 
 selling company. Under these conditions the latter com- 
 pany is almost sure to obtain especially favorable terms of 
 commission, and indeed in some cases the selling organiza- 
 tion has deterioratd into a scheme for bleeding the manu- 
 facturing corporation. 
 
 (4) Selling Through the Wholesaler. In the majority of 
 cases, the manufacturer sells to the jobber or wholesaler, 
 the wholesaler to the retailer, and the retailer to the con- 
 
MODERN BUSINESS ORGANIZATION 159 
 
 siimor. The selling process is therefore broken up into 
 stashes, each stage having its own separate organization. 
 Ilent'C the manufacturer organizes his selling (h'})artinent 
 with special reference to catering to the wholesale trade 
 and whenever inquiries come from the retailers or consum- 
 ers, they are referred to the wholesaler who controls the 
 territory in which the prospective customer lives. 
 
 The first step in the process of organization consists in 
 dividing the countiy into distinct territorial groups and 
 appointing a district manager for each. The selling branch 
 of the manufacturing company then deals directly with tlie 
 district managers, and the district managers in their turn 
 with the salesmen in their own territories. The district man- 
 ager either directly or through his assistants makes ar- 
 rangements for the sale of his goods to the wholesalers in 
 his district. 
 
 Goods are sold to the wholesaler either on general ordci*s 
 or on special contracts. In the first case, the terms of sale 
 are fairly uniform in the trade, and the work of the district 
 manager consists in making his goods known and in pro- 
 viding for their speedy delivery whenever the orders are 
 sold. Consequently the personal and intellectual quali- 
 ties of the district manager and his chief assistants count 
 for much. This is the reason for the especial attention giv- 
 en such qualities as personal address and the details of mer- 
 chandising in the various books and articles on this partic- 
 ular subject. In the second case, the company makes ex- 
 clusive contracts for the sale of the goods in a given ter- 
 ritory. The work of the manager is here chiefly directed 
 to making these contracts and to seeing that they are re- 
 newed whenever the term expires, or in dissatisfaction, are 
 transferred to a rival merchant. This system prevents the 
 wholesaler from competing in the price of the same goods, 
 but has the disadvantage of etTecting the sale through only 
 a portion of the trade. This disadvantage, however, is 
 not a verv serious one in the wholesale trade, but is of 
 
160 MAURICE H. ROBINSON 
 
 course impracticable for many lines in the retail business. 
 The exclusive contract system enables the manufacturer 
 to control the retail price of his goods, and in cases where 
 the articles possess peculiar merit, this feature is a valu- 
 able one. When, however, the goods sold are of standard 
 quality and design, the price is regulated by competitive 
 conditions and the exclusive contract has very little to 
 recommend it. 
 
 A modification of the exclusive contract is found in the 
 provision sometimes made that the merchant may sell no 
 competing goods. This method is employed by manufac- 
 turers having a partial monopoly and where the control of 
 the trade is not sufficiently extensive to enable them to 
 control the price in any other way. Sometimes these con- 
 tracts are impracticable, and the same results are secured 
 by the adoption of the so-called factor system. This plan 
 was adopted on a large scale for the sale of refined sugar in 
 1893, and has been used in many other lines since then. It 
 consists in offering a special rebate to those wholesalers who 
 purchase their goods solely from one manufacturer, and who 
 in addition maintain the price fixed by the manufacturers. 
 
 (5) Selling Through the Retailer. John Wanamaker is 
 authority for the statement that until the Centennial Exhi- 
 bition in Philadelphia in 1876, practically all manufactured 
 goods were sold through the wholesaler and the retailer, but 
 that since then the middleman has been gradually eliminat- 
 ed in certain lines and is becoming of less importance in al- 
 most all fields of merchandising. The manufacturer, in 
 other words, has been getting nearer the ultimate consumer, 
 and the first step in the process is to eliminate the whole- 
 saler and sell directly to the retailer. 
 
 This change in the method of selling has caused impor- 
 tant modifications in the selling organization. In the first 
 place, the manufacturers are obliged to maintain an ex- 
 tensive force of traveling salesmen in order to cover the 
 territory properly and protect themselves from rival man- 
 
MODERN BUSINESS ORGANIZATION 161 
 
 iifaetiircrs. This necessitates a much more elaborate sell- 
 ing- ors^anization and vastly complicates the pro])lem of 
 the selling management. In the second place, this system 
 favors the adoption of the exclusive territory plan, exclu- 
 sive contracts, and exclusive agencies, in order to lessen 
 the expense of protecting the trade amon^ the retailers. 
 In the third place, this system demands extensive advertis- 
 ing on the part of the manufacturers in order to create a 
 demand for their goods and thus facilitate the work of the 
 district manager and his traveling salesmen. 
 
 In most cases the manufacturers who adopt the policy of 
 selling to the retail trade are not in a position to cover the 
 whole available territory. Consequently, they either work 
 certain territories and permit their rivals to enjoy the rest 
 undisturbed, or cover the whole territory in a slipshod way. 
 The first method is, of course, preferable, although it is al- 
 ways more difficult to work a territory intensively than ex- 
 tensively. For this purpose certain manufacturers have 
 established wholesale branches resembling the ordinary 
 wholesale store, with the exception that tlie work of the 
 branch is devoted exclusively to the sale of the manufactur- 
 er's goods. Each branch then takes charge of the selling 
 organization within its particular territory. A few of the 
 manufacturing companies, like the Standard Oil Company 
 for example, are large enough to work the entire tenitor}^ 
 of the whole civilized world in a fairly intensive way. For 
 the best results, however, a company must be of enormous 
 producing capacity and this usually means that it is practi- 
 cally the only producer. The growth of m(nio])olisti(' man- 
 ufactures is thus intimately connected with the method by 
 which goods are sold to the retail trade. 
 
 (6) Direct Selling. The manufacturer may, instead of 
 adopting any of the above methods, choose the plan of sell- 
 ing directly to the consumer. This may be done either by 
 establishing stores in a part or all of the available territory, 
 or by employing house to house salesmen, or by extensive 
 
 B— II— U 
 
162 MAURICE H. ROBINSON 
 
 advertising and the mail service. The second method is 
 emplo3^ed by small manufacturers in limited territorial 
 areas and by some of the greatest corporations, as, for ex- 
 ample, the Standard Oil Company, with its house to house 
 delivery system. This is, however, an exceptional method. 
 The third method is an expensive one and is usually com- 
 bined with one or both of the other two. It has, however, 
 been used by the mail-order houses with great success in a 
 few cases. The mail-order house is not, however, primarily 
 a manufacturer. It is a middleman, purchasing goods of 
 the manufacturer or wholesaler and distributing directly 
 to the individual consumer. The mail-order system is also 
 employed by the wholsaler with considerable success. 
 
 The first method of direct selling, namely, through the 
 establishment of retail stores by the manufacturer, is per- 
 haps the most radical change in the selling organization 
 that has been inaugurated in recent years. Perhaps the 
 best example of this feature of selling is found in the shoe 
 trade, where several of the manufacturers maintain fully 
 equipped retail stores for the exclusive sale of their own 
 shoes in many of the large cities. The same plan has been 
 extensively adopted by the American Tobacco Company 
 through the organization of the United Cigar Stores Com- 
 pany and the establishment of many retail stores in the com- 
 mercial centers. Some of the brewers are in fact virtually 
 the owners of retail saloons and thus engage in retail sell- 
 ing, although this fact does not ordinarily appear on the sur- 
 face. And some business establishments that are primarily 
 engaged in retailing have established manufacturing 
 branches and in this way become the retailers of their own 
 products. 
 
 Where the manufacturer establishes and maintains re- 
 tail stores the organization of the selling division is fairly 
 simple. Each store is under the direction of a manager who 
 has charge of its operations, directly responsible to the gen- 
 eral selling department. Goods are consigned to the va- 
 
MODERN BUSINESS ORGANIZATION 163 
 
 rioiis stores, charged, and as fast as sold the cash is de- 
 posited to tlie account of the company. The company then 
 is a])le to detennine the eaniing capacity of each store. It 
 will be observed, of course, that this system simplifies the 
 central selling office of the manufacturer, since the market 
 for the goods is found through the local stores. 
 
 The selling division has two special functions: First, 
 to select the proper method of selling the goods; and sec- 
 ond, to organize the forces of district managers and super- 
 vise their operations. Tlie selection of the proper method 
 is determined chiefly by the character of the goods, and 
 secondly by the customs of the trade. Standard goods are 
 chiefly sold to the trade in the regular way; specialties, 
 on the other hand, often give better results on exclusive 
 contracts of either the first or the second class. Unless, 
 however, the wholesalers and the retailers are accustomed 
 to the exclusive contract system, its adoption will always 
 be of slow growth. 
 
 The selling division of the sales department is ordinarily 
 under the direction of a general manager or, as in the case 
 of the National Cash Register Company, a sales commit- 
 tee. In conformity with the plan of organization herein 
 suggested, the general manager would be co-oi-dinate in 
 rank with the advertising manager, the head of the bureau 
 of estimates, and the chief order clerk. His work, however, 
 demands a higher order of business ability and a more ex- 
 tensive experience. Consequently, the selection of the gen- 
 eral manager of the selling division is one of the most im- 
 poi-tant functions of the general executive. Tlie general 
 manager in turn selects the heads of divisions and the dis- 
 trict managers, and approves the selection of their ranking 
 subordinates. 
 
 In the management of the selling division, the general 
 manager takes into considorntion. fii-st, the actual and pros- 
 pective sales, and second, the expense of making the same. 
 To promote the first he needs to be in constant and intimate 
 
164 MAURICE H. ROBINSON 
 
 toucli witli the advertising policy. This contact is se- 
 cured through the general sales agent's office, immediately 
 superior to both the advertising manager and the general 
 manager of the selling division. Again, he ought to know 
 the character of each district, the industrial and financial 
 conditions, the crops, and the habits of life in that territory. 
 In this way he may estimate the consuming capacity of the 
 population with respect to his goods and thus assign each 
 district manager his proper quota. As soon as it becomes 
 evident that any one of the managers will be unable to dis- 
 pose of his quota within the proper time limit, the general 
 manager should inquire into the causes, and, having found 
 them, endeavor to apply the proper remedy. If the district 
 manager is inefficient he should be replaced; if dishonest, 
 he should be discharged and prosecuted; if ignorant but 
 otherwise qualified, he should be instructed. 
 
 To detennine the actual conditions within each district 
 manager's office, it is necessary to establish a more or less 
 elaborate system of reports showing sales, prospects, col- 
 lections, credits, and business conditions in each district. 
 The district manager, however, should possess independent 
 sources of information for the purpose of checking the ac- 
 curacy of the salesmen's reports. Such inforaiation is or- 
 dinarily gathered through the follomng sources: First, 
 the retailers. The dealers are in a position to know the bus- 
 iness and trade conditions in their vicinity, and the letters 
 from a considerable number will usually give a fairly ac- 
 curate picture of such conditions. Second, the reports of 
 bank clearings for each section of the country may be used, 
 and, to supplement these reports, the commercial move- 
 ments as recorded by the United States Government 
 through the Department of Commerce and Labor, by the 
 commercial papers, and by such institutions as Dun's and 
 Bradstreet's. Third, the reports of the Weather Bureau 
 are valuable, showing as they do, the rain-fall, crop pros- 
 
MODERN BUSINESS ORGANIZ^ATION 165 
 
 pects, etc. Finally, reports from salesmen in otlier dis- 
 tricts where the conditions are similar. 
 
 Tliese various reports are supplemented in some husi- 
 ness enterprises by what is known as the "map and tack" 
 system, a device employed to show^ the number and kind of 
 sales in every part of the country. This system consists 
 simply of a map of the country, conveniently mounted, and 
 a number of tacks of different designs, each special design 
 representing certain facts in regard to the work of the sell- 
 ing department in the given territory. Thus a black tack 
 may represent an inquiry; a white tack, a salesman; a green 
 tack, a sale; a white tack with black dots, the number of 
 times a town has been visited within the year. In this way 
 all the pertinent facts with regard to the sales in a given 
 territory may be recorded and by proper changes kept up to 
 date. By comparing with maps in different parts of the 
 country, the relative efficiency of the different district man- 
 agers and their salesmen may be ascertained and means 
 taken to improve the efficiency of the selling organization 
 in those districts Avhere it is weakest. 
 
 (4) The Order Division. The order division of the sales 
 department is cliiel^y clerical in its nature and demands 
 accuracy and system. In small companies the original 
 orders are forwarded and filed directly by the manufac- 
 turing department. In the larger enterprises it has been 
 found necessary, in order to prevent mistakes, to copy the 
 orders upon standard forms, to file duplicates, and to send 
 the order on to the ])roper department to be filled. Tlie 
 order department is usually under the control of a chief 
 clerk, res])onsil)le to the general sales agent. lie needs a 
 sufficient num])er of clerks and copyists to kee]i his files 
 clear and his office must, of course, be supplied with the nec- 
 essary filing apparatus. 
 
166 MAURICE H. ROBINSON 
 
 The Traffic Department. 
 
 This department appears under different names in dif- 
 ferent business enterprises and sometimes it exists without 
 any name at all. Where it has a name, it may be called the 
 shipping department, or the transportation department, 
 etc., etc. Where it has no name, its work is ordinarily car- 
 ried on as a branch of the manufacturing department or in 
 some cases, of the sales department. In any case, its func- 
 tion is distinct and its work necessary. 
 
 The object of the traffic department is to see that the 
 goods turned out by the manufacturing department and sold 
 b}^ the sales department are shipped in the most acceptable 
 manner and by the most convenient and inexpensive route 
 to their destination. A fully equipped traffic department, 
 therefore, includes two branches: First, a shipping divis- 
 ion; and second, a rate division. The first has charge of 
 storing, packing, and shipping; the latter, of rates, routes, 
 claims, and other related matters. The first of these is 
 often under the control and supervision of the manufactur- 
 ing division. Its proper place, however, is as a branch of 
 the traffic department, which, being in charge of rates and 
 the manner of shipment, is in a better position to supervise 
 the packing, since the kind of boxing and packages used is 
 determined chiefly by the method of shipment and the route 
 over which the goods are to go. This plan of organization, 
 therefore, conduces to economy of expense and convenience 
 of service. It has often been remarked that our American 
 manufacturers fail in the foreign market owing to their 
 inconvenient method of packing their goods. A traffic 
 department would be more likely to understand conditions 
 and the foreign likes and dislikes, and thus to cater to the 
 foreign trade. 
 
 The rate division is, of course, a branch of the traffic de- 
 partment. It is under the direction of a chief rate clerk, 
 directly responsible to the traffic manager. The chief rate 
 
MODERN BUSINESS ORGANIZATION 
 
 167 
 
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168 MAURICE H. ROBINSON 
 
 clerk is often selected from the staff of some railway, owing 
 to the fact that this division has in the past been neglected 
 by our manufacturers. As the importance of this work 
 becomes better known, more attention will be given to this 
 branch, and the officers will come up through the ranks by 
 promotion rather than be chosen from the railway service. 
 The rating division must, of course, be thoroughly posted 
 upon railway rates, railway routes, time cards, connections, 
 through express service, junction points, and the like. It 
 makes contracts for regular shipments and for special de- 
 liveries. It sees that the goods are delivered and if not, 
 makes and prosecutes the claims for the same. In some 
 cases this branch of the manufacturing department actually 
 operates cars, boats, and other means of transportation. 
 Then the department becomes of very great importance and 
 often takes a regular place in the railway world by entering 
 into competition with other railways for the traffic of other 
 manufacturers. To make the above analysis of the operat- 
 ing organization plain, the diagram on the previous page 
 is shown. 
 
 VI. INTER-RELATIONS OF BUSINESS 
 ENTERPRISES. 
 
 Business enterprises, whether controlled by the individ- 
 ual proprietor, the partnership, the corporation, or the co- 
 operative society, are entirely independent of each other in 
 their working operations except so far as they voluntarily 
 form alliances of more or less permanence and of greater 
 or less vitality. Indeed, until the middle of the last cen- 
 tury their individual independence was so marked and dom- 
 inant that the theory of political economy as well as of law 
 was largely based upon this idea. With the introduction 
 of machinery, the bringing of large groups of capitalists and 
 workingmen together into closer proximity, with the devel- 
 opment of the railroad, the telegraph, and the bringing of 
 industrial enterprises into direct competition, the struggle 
 for existence was extended to the business field. 
 
MODERN BUSINESS ORGANIZATION 169 
 
 As a result of tlie now conditions various forms of unions 
 have been originated and adopted, all having a common pur- 
 pose, namely, to subserve the interests of the parties to the 
 organizations. The form of union adopted varies with the 
 character of the parties to it, with the purposes to be at- 
 tained, and with the local conditions in the various coim- 
 tries in which they are operated. But all of these organiza- 
 tions, whatever their foiTn, have one feature in common, 
 namely, they unite business enterprises into a higher type 
 of organic union. Just as individuals unite into partner- 
 ships, corporations, or co-operative societies, so business 
 enterpnses join together to form business alliances of va- 
 rious kinds and for various purposes. 
 
 Tlie more important of these alliances are the associa- 
 tion, the combination, the trust, the holding corporation, 
 and the leasing company. In addition to these, informal 
 alliances are sometimes devised, such as the community of 
 interests; and finally a complete merger may take place, in 
 which case the alliance is made direct and permanent and 
 the formerly independent or partially independent business 
 enterprises lose their identity, being pennanently amalga- 
 mated into a new union of greater size and greater com- 
 plexity. 
 
 The Association. 
 
 The association is a voluntary alliance of business enter- 
 prises for the purpose of furthering their common inter- 
 ests. Its members may ordinarily withdraw at any time, 
 and usually each one is required to pay a small annual fee 
 in order to continue in the organization. The association 
 works through a central board of directors or a central com- 
 mittee, elected from the membei^ship. Its efficiency de- 
 pends upon two things: First, the activity of the central 
 committee; and second, the co-operation of the individual 
 members. If the central committee is inefficient, or if the 
 members fail tu co-operate, the association is a failure. If, 
 
170 MAURICE H. ROBINSON 
 
 however, the committee is active and vigilant, and is sup- 
 ported b}^ substantial contributions resulting in a full treas- 
 ury, it is possible to accomplish much even though the indi- 
 vidual members of the organization devote themselves en- 
 tirely to their own private interests. 
 
 The association has two principal types, the first being 
 composed of various kinds of business enterprises within a 
 given territory, and the second, of business enterprises of 
 the same character with little or no regard to geographical 
 location. 
 
 The first type is illustrated b}^ local commercial clubs 
 and chambers of commerce of various cities, and the second 
 type, by the trade and manufacturing associations of va- 
 rious states and of the United States where membership is 
 confined to one branch of business activity. The first type 
 varies greatly in size and efficiency, but all have the com- 
 mon characteristic of uniting business enterprises of many 
 kinds within the same territory. Some of these associa- 
 tions are informal in character, while others operate under 
 a charter provided for associations working for general 
 purposes rather than for direct pecuniary profit to the mem- 
 bers. To illustrate the work of this type of general associa- 
 tion, the following organizations have been selected: The 
 Chamber of Commerce of Champai2:n, Illinois, and the Mer- 
 chants' Association of "New York City. 
 
 The Champaign Chamber of Commerce was founded in 
 1900 by the retail merchants of the city for the purpose of 
 establishing and maintaining a co-operative credit-rating 
 society. Gradually other interests sought admission to 
 its membership and with its enlargement came an extension 
 of its activities about five years after its foundation. It 
 was then incorporated under the Illinois act for societies 
 not operating for pecuniary profit, and subsequently has 
 still further enlarged its work until its scope of operation is 
 now co-extensive with the political, social, and business ac- 
 tivity of the city. Within the past three years it has been 
 
MODERN BUSINESS ORGANIZATION 171 
 
 instnimental in securing early closing during the summer 
 months, and has taken a prominent part in securing im- 
 provements in the city government, especially in the fire 
 department, the parks, the water system, and pavements. 
 It has been the medium of securing for the community more 
 favorable conditions in express and railway rates; it has 
 assisted in locating some important manufacturing estab- 
 lishments in the city, and is carrying on a movement look- 
 ing towards the improvement of the roads in the locality. 
 
 Thus the Champaign Chamber of Commerce, beginning 
 as an organization of retail merchants chiefly for selfish 
 purposes, has by the process of natural evolution become an 
 association representing all the interests of the city and 
 devoted to the general welfare rather than the special in- 
 terests of a class. 
 
 The ^Merchants' Association of Xew York City is a sec- 
 ond example of a general business association, representing 
 this type in its most comprehensive form. This association 
 was founded in 1898 *'to foster trade and commerce and the 
 interests of those having trade, business and financial inter- 
 ests in common in the State of New York and elsewhere, to 
 reform abuses relative thereto, or affecting the same, to se- 
 cure freedom from unjust or unlawful exactions, to dif- 
 fuse accurate and reliable information concerning matters 
 relating thereto or otherwise, to procure uniformity and 
 certainty in the customs and uses of trade and commerce, 
 to settle differences and to procure uniformity of opinion 
 and action and co-operation between its members, to pro- 
 cure a more enlarged, united and fnendly intercourse and 
 action between business men, and to do such other and fur- 
 ther acts and things relating thereto which may be found 
 necessary or convenient, so far as the same are permitted by 
 the laws of the State of New York to corporations organized 
 under this act." * 
 
 It is chartered under the membership corporation law 
 
 ♦ Year Book. Merchants' Association of New York. 1910. 
 
172 MAURICE H. ROBINSON 
 
 of New York and consequently is managed by a board of 
 directors and the nsual executive officers. Upon the oper- 
 ating side it ^^'orks through committees, some of which are 
 permanent and some temporary. The committees are as 
 follows : 
 
 Executive. Gas and electricity. 
 
 Commercial law. Express transportation. 
 
 City conditions. Foreign and colonial 
 
 City plan. commerce. 
 
 City transportation and Harbor and shipping, 
 
 terminals. Insurance. 
 
 Currency. International arbitra- 
 
 Customs service and tion. 
 revenue laws. Judicial administration. 
 
 Domestic commerce. Library, 
 
 Pollution of state waters. Postal affairs. 
 
 Protection of industrial Taxation and finance, 
 
 property. Teraiinals and port 
 
 Telephones. charges. 
 
 Water supply. 
 
 The committee list shows in a general way the varied 
 activities of this association. During the year 1909 the 
 organization was especially active in the following lines: 
 Special passenger rates for merchants visiting New York, 
 western freight rate cases, Chattanooga Rate case, port 
 differentials, express rates in New York State, uniform 
 bill of lading, removal of steam railway tracks from the 
 streets of the city, improving waterways and harbors, 
 establishment of a permanent tariff commission, and city 
 administration. 
 
 Wliile the Merchants' Association of New York City is 
 founded upon the territorial idea, it recognizes the special 
 interest of trade groups by arranging for informal meet- 
 ings of the various lines of commercial and industrial ac- 
 tivities in the city. For example, during the year 1909, 
 
MODERN BUSINESS ORGANIZATION 173 
 
 informal meetings of the jewelry and allied trades, wom- 
 an's apparel trades and the white goods division of tlu^ 
 dry goods trade, were held for the pnrpose of discussing 
 topics of special interest to these groups. It is the plan to 
 continue these group meetings until all the important trade 
 groups in the city have heen reached. The inauguration 
 of this policy had the effect of increasing the membership, 
 thus securing the interest of many business enterprises not 
 attracted by the general association. 
 
 The second type of organization caters to the special 
 interests of a particular industrial or commercial group. 
 The scope of its work is therefore more limited in charac- 
 ter, but it gains in efficiency where it loses in breadth. 
 These associations are exceedingly numerous and all arc 
 formed upon essentially the same principle and operated in 
 the same general way. Among the organizations the Illi- 
 nois Manufacturers' Association has been selected for pur- 
 poses of illustration. This organization was founded in 
 1898 and operates under an Illinois charter provided for 
 such societies. It therefore has a board of directors and 
 the usual list of executive officers. Its membership is 
 made up of manufacturers of all classes having plants lo- 
 cated within the state, and in addition includes a few man- 
 ufacturers whose plants are situated outside the state but 
 whose work is intimately connected with industrial condi- 
 tions within Illinois. Like other associations it oper- 
 ates chiefly through committees, some of which are per- 
 manent and some of which are temporary. During the 
 year 1910, this association was interested especially in 
 two particular projects: First, a conference of industrial 
 and commercial organizations for the purpose of securing 
 the repeal of the coi-poration tax law; and second, in a con- 
 ference of shippei-s and commercial organizatioi^ for the 
 purpose of opposing an advance in freight rates both east 
 and west. At each of these conferences representatives of 
 business enterprises from all parts of the country^ were 
 
174 MAURICE H. ROBINSON 
 
 present and a general discussion of the propositions was 
 held in open meeting. As a result of the first conference, 
 that on the corporation tax law, a committee was sent to 
 Washington to present the views of the association to the 
 Federal Congress. A series of resolutions were drawn up, 
 discussed, and finally adopted, and a committee of eleven 
 was appointed for the purpose of presenting the resolu- 
 tions. While it is impossible to ascertain just what in- 
 fluence this conference had, it is claimed by the association 
 that it resulted in suppressing the publicity clause of the 
 federal corporation tax act. 
 
 The second conference was attended by a large number 
 of representatives of business enterprises located chiefly in 
 Illinois, and the Central West. At this meeting the general 
 subject of the economic effect of advanced freight rates, 
 as well as the legal aspects of the question, were discussed, 
 and as a result a series of resolutions were adopted to the 
 following effect: 
 
 1. That the income of the various railroads has been in- 
 creasing during the past ten years; 
 
 2. That during the first seven months of the year 1910 
 the net income of the principal trunk line railroads had 
 also increased; 
 
 3. Tliat in their opinion a reduction, rather than an ad- 
 vance, was demanded by present conditions. 
 
 Accordingly all the railroads in the Official Classification 
 territory were asked to suspend the proposed advance in 
 commodity rates and submit the question to the Interstate 
 Commerce Commission for arbitration to determine wheth- 
 er any general advance in rates was reasonable and neces- 
 sary. For the purpose of carrying these resolutions into 
 effect a committee of fifteen, representing the general con- 
 ference, was appointed and entrusted with the duty of 
 presenting the views of the conference to the Interstate 
 Commerce Commission and the railroads. In addition to 
 the two important conferences above described, the Uli- 
 
MODERN BUSINESS ORGANIZATION 175 
 
 nois ^Nranufacturers' Association, throuj^h its pormaiioiit or- 
 ganization, is constantly engaged in activities for the pur- 
 pose of protecting tlie interests of manufacturers of the 
 state from the various industrial interests with which 
 they come into conflict, and at the same time for improving 
 the conditions under which the manufacturers are work- 
 ing. 
 
 In common with the commercial associations, the Illi- 
 nois Manufacturers' Association, it will be noticed, works 
 chiefly through indirect methods of influencing other or- 
 ganizations and especially the state legislature and the 
 national Congress. Whenever any measure is proposed, 
 which, in the opinion of the association, would be detri- 
 mental to the interests of manufacturers, the views of the 
 organization are presented through a committee of the as- 
 sociation to the proper committee of the legislature. 
 Whenever legislation is proposed in which they are inter- 
 ested they assist in securing such legislation. To show the 
 extent of the work which has been imdertaken by the asso- 
 ciation, the following quotation from a pamphlet issued 
 by this organization is added: 
 
 **Our Association stopped the publicity required by 
 the Federal corporation tax law. 
 
 **We took the initiative in securing the appointment of 
 a state commission to draft an employers' liability measure 
 to submit to the next Illinois General Assembly. 
 
 "We secured for manufacturers of this state reasonable 
 factory inspection, hazardous machinon- legislation, and 
 defeated a very unfair measure that it was attempted to 
 put through the legislature. 
 
 "We are now opposing the proposed increase of from 
 twelve to sixteen per cent in the freight rates on coal in 
 Illinois and Indiana, because an advance at this time is 
 unwarranted by conditions and cannot be added to cost 
 of marketing our product. 
 
176 MAURICE H. ROBINSON 
 
 **We have a committee wliich is working out a plan to 
 take care of the refuse and discarded material. 
 
 *'AVe have created a bureau whose influence Avill be used 
 to minimize thefts in your plant. 
 
 "We have a committee that has started an agitation to 
 secure the best possible public highways for the $7,000,000 
 taxes which the property owners of this state pay every 
 year for that purpose. 
 
 *'We are agitating the rearrangement of railroad ter- 
 minals in Chicago so that freight can be handled more ex- 
 peditiously, which means economy." 
 
 The Combination. 
 
 The combination like the association is made up of busi- 
 ness enterprises which are otherwise independent. In the 
 case of the combination, however, these enterprises are 
 generally engaged in the same line of industrial activity. 
 It differs from the association in that it imposes certain 
 duties upon each of the members to it, and consequently 
 in order to be a successful combination it must embrace a 
 large majority of all business enterprises of the same kind 
 within a given market. A combination is held together by 
 an agreement or contract specifying the terms under which 
 the members unite into the union. Each enterprise thus 
 loses a part of its independence, but retains its liberty in 
 all points not covered by the terms of the agreement. 
 When a member of the combination breaks the rules of the 
 organization, it to that extent nullifies the work of the or- 
 ganization. Such an organization may be either legal or 
 illegal. Wherever they are legal the articles under which 
 the}^ operate constitute a contract and may be enforced as 
 other contracts. Wlierever such organizations are illegal, 
 their permanence and efficiency depend entirely upon the 
 willingness of each of the members to live up to the terms 
 of the combination. 
 
 In the United States such organizations have from the 
 
MODERN BUSINESS ORGANIZATION 177 
 
 beginning held to be cither invalid or crimiiial. lu the 
 first ease the state and national authorities will not assist 
 an organization in its efforts to secure obedieuce to the 
 general agreement. In the second case, the state admin- 
 istrations will, under proper conditions, take steps to pun- 
 ish the members of such organization for becoming mem- 
 bers of a criminal organization. 
 
 Combinations are formed for the purpose of directly 
 increasing the business prosperity of the various members. 
 This may be accomplished either by lessening competition 
 and thus enabling the industry in which the combination is 
 formed to secure better prices; or by improving the oper- 
 ating conditions, thus lowering the cost of production. 
 Since a combination is at best a temporary affair, and the 
 members retain their own individual rights except so far 
 as the agreement or contract extends, it is usually impos- 
 sible to secure economies in manufacturing and ordinarily 
 impracticable in either purchasing the materials or selling 
 the goods. Consequently a combination is forced to direct 
 its energies toward lessening competition and securing in- 
 creased prices. On this account combinations are classi- 
 fied in accordance with the means which they take to se- 
 cure this end, and are therefore divided into the following 
 groups : 
 
 1. Price combinations. 
 
 2. Production combinations. 
 
 3. Geographical combinations. 
 
 4. Combinations for sharing the business. 
 
 5. Combinations for sharing the profits. 
 
 1. In a price combination the agreement pro^ndes for 
 a cei'tain minimum price below which no mem])er of the 
 combination can sell a specified line of goods. C(mse- 
 quently this form of organization is adapted to those lines 
 of industry in which goods are of a staple quality and 
 standard designs. In any other line it has the effect of in- 
 
 B— H— 12 
 
178 MAURICE H. ROBINSON 
 
 creasing competition in the quality of the goods while lim- 
 iting it in regard to the price. Price combinations, there- 
 fore, are of importance in only a comparatively few lines 
 of manufacturing. 
 
 2. A limitation of output has the same effect as a price 
 combination in an indirect way — by limiting the produc- 
 tion the price can be maintained. For example, if the out- 
 put of factories producing a certain line of goods be limited 
 to two-thirds of their capacity, the supply of goods on the 
 market will be decreased and the price will automatically 
 rise to a higher level. This form of combination is there- 
 fore useful wherever it is more convenient to limit the out- 
 put than it is to limit the price. 
 
 3. Wherever it is difficult to limit either price or output, 
 and the factories are located in distant territories, the third 
 form of combination is sometimes used. The territory is 
 divided into districts and each manufacturer is assigned 
 a particular territory within which he may supply the 
 trade without competition from any other producer. Cus- 
 tomers from without the territory of any particular mem- 
 ber of the combination are either referred to the manufac- 
 turer within the district to which the consiuner belongs, or 
 the order is nominally filled by the manufacturer receiv- 
 ing it, but the actual production of the goods and the profit 
 for the same are assigned to the proper member of the com- 
 bination. 
 
 4. In certain industries neither of the above forms of 
 combination is practicable. Hence manufacturers ar- 
 range in advance to share whatever orders may come upon 
 the market upon the percentage basis. For example, Co. 
 A will receive 15 per cent, Co. B 10 per cent, Co. C 5 per 
 cent and so on until the total production is provided for. 
 Whenever orders are received they are either divided di- 
 rectly and assigned to the companies in the proper propor- 
 tions, or the orders are assigned to particular manufactur- 
 ers in such a way that their proper quota is maintained. 
 
MODERN BUSINESS ORGANIZATION 179 
 
 5. In the profit-sliaring combination each niomhcr is 
 entirely independent of the others in mannfaetnrin^ the 
 goods and usually in their sale. The total profits of the 
 business of an entire group is, through a central account- 
 ing office, ascertained and distrilmtcd among the various 
 members in accordance with a scale agreed upon at tlie 
 establishment of the organization. Consequently, the 
 members of the combination are interested not in their own 
 individual ]">rofits, but in the combined profits of the entire 
 organization. Hence it is for the interest of each party 
 to maintain the prices and limit the output so far as neces- 
 sary in order to make the profits of the entire organization 
 the greatest possible. The member who cuts prices for the 
 sake of increasing his own output, increases his own prof- 
 its, but he does this at the expense of the profits of the 
 other members. He therefore finds that his share of the 
 profits, as determined by the central office, is increased 
 by maintaining a price policy that is favorable to the busi- 
 ness interests of the industry rather than that of his own 
 particular plant. 
 
 In the United States the combinations have two marked 
 disadvantages: First, they are unable to effect economies 
 in production; and second, they are non-enforceable at 
 common law, and since about 1880 they have generally 
 been made illegal under statute law. "Wiu'le in certain in- 
 stances they have been remarkably successful for a limited 
 period, generally they have been short-lived and at their 
 termination conditions in the industry have been so dis- 
 advantageous as to overcome partially if not wholly all 
 the advantages which had been secured during the short 
 period of the combination. Consequently the business in- 
 terests have sought other means of securing the end and 
 have generally adopted in recent years some one of the 
 following foiiiis of organization. 
 
180 MAUEICE H. liOBINSON 
 
 Truste. 
 
 In the Unite'd States the trust was the direct successor 
 of the combination. It was devised by the Standard Oil 
 Company in 1879 and is generally accredited to Mr. Dodd, 
 the general solicitor of that corporation. In theory the 
 trust is so simple that the wonder is that it was not devised 
 earlier. In the first place, all business enterprises be- 
 coming parties to a trust are incorporated, if they are not 
 already corporations. A board of trustees is then arranged, 
 which issues trust certificates equal in amount to the 
 sum of all the shares in the various corporations. Trust 
 certificates are then exchanged for the shares of stock, or 
 so many thereof as become parties to the trust. It is neces- 
 sary that over one-half of the voting shares in each one of 
 the corporations be exchanged for trust certificates in or- 
 der that the trust may work successfully. The board of 
 trustees then controls each of the corporations, elects the 
 directors, and through them determines the business pol- 
 icy of each one of the subsidiary corporations. The hold- 
 ers of the trust certificates elect the trustees, make the by- 
 laws, and receive the dividends declared upon trust certif- 
 icates in exactly the same way as the shareholders in the 
 ordinary corporation. 
 
 The trust thus possesses all the advantages of the combi- 
 nation, and in addition certain others of great importance 
 which the combination never could attain. Like the com- 
 bination, the trust could regulate and maintain prices, limit 
 the output, or divide the territory whenever such a policy 
 was thought advisable. It could distribute the work 
 among the several corporations, and by virtue of its organ- 
 ization the profits were shared in proportion to the trust 
 certificates held by the former shareholders in the several 
 corporations. Furthermore, whenever practicable, all of 
 the shares were thus exchanged and the trust became prac- 
 ticall}^ a permanent organization; it was therefore possible 
 
MODERN BUSINESS ORGANIZATION 181 
 
 to secure all the economics of ccntralr/cd inaTiaejcment 
 and concentrated production. The tnist, controlling the 
 election of the directors in the subsidiary corporations, 
 could consolidate the administration hy appointing a gen- 
 eral sales agent, a general manager for the plants, a gen- 
 eral auditor and a general treasurer. Consequently stand- 
 ard methods in all departments could be introduced and a 
 comparative method of securing efficiency installed and 
 operated. The production could be concentrated in the 
 plants most economically located and operated, and plants 
 operating with less efficiency could be dismantled or sold. 
 On account of these advantages, the success of the 
 Standard Oil Trust and of its immediate predecessors was 
 so pronounced that a considerable number of trust organ- 
 izations were formed and this became the characteristic 
 method of uniting business enterprises during the decade 
 from 1880 to 1890. That this form was not more widely 
 adopted was due to two causes: First, the difficulty of ad- 
 justing the interests of the several business enterprises 
 united; and second, the decision of the supreme courts 
 in New York and Ohio to the effect that the trust fonn of 
 organization was illegal. It was therefore abandoned and 
 the consolidations operating under this particular form 
 of organization were converted into a new type of organiza- 
 tion which will now be described. 
 
 The Holding Corporation. 
 
 The holding corporation is in many respects compar- 
 able with the trust. It consists in the incorporation of a 
 company under the laws of some one of the several states, 
 witli a charter permitting the enterprise so organized to 
 hold shares of stock in other coi^porations as well as physi- 
 cal property. The holding corporation dates from as early 
 as 1832 when the Baltimore & Ohio Railroad Company was 
 authorized by the State of ^laryland to subscribe to shares 
 of stock in the Washington Branch Road. This method 
 
182 MAURICE H. ROBINSON 
 
 was used on a large scale by the Pennsylvania Railroad 
 Company as early as 1853, and it was adopted by that 
 company in 1870 as an appropriate method for controlling 
 the Pennsylvania lines west of Pittsburg. 
 
 From this time on it became a fairly common instru- 
 ment by which business enterprises, especially in the rail- 
 road field, were consolidated into one organic union. Until 
 1888, however, it was necessary to obtain special authori- 
 zation for the purpose of holding shares of stock in other 
 corporations. In that year the State of New Jersey provid- 
 ed by an amendment to the corporation act that companies 
 chartered under her laws might in certain cases hold stock 
 in other corporations. In 1889 the law was further amend- 
 ed by providing that corporations, where their charter so 
 provided, might hold stock in corporations in which they 
 were directly interested, and in 1893 the act was made gen- 
 eral, pennitting any corporation to hold stock in any other 
 corporation. 
 
 The holding corporation then became the direct succes- 
 sor of the trust. It was not, however, adopted in a general 
 way until about ten years after it was first generally au- 
 thorized, but during the period from 1898 to 1901 a large 
 number of holding corporations were organized and since 
 that time it has become a characteristic form of organizing 
 business enterprises into a permanent form of union. 
 
 In its structure the holding corporation is identical with 
 the ordinary corporation. It is composed of a group of 
 shareholders who own stock, elect the directors, receive 
 the dividends, and possess the same rights and are under 
 the same obligations as the shareholders of a regular cor- 
 poration. It differs however in one important respect. Its 
 property account is made up of shares of stock in one or 
 more corporations rather than the real estate, buildings, 
 and other assets of the ordinary corporation. The holding 
 corporation receives its income from the dividends declared 
 by the corporations whose shares it holds, and such income 
 
MODERN BUSINESS ORGANIZATION 183 
 
 is then declared out in dividends to its own shareholders. 
 Like the trust the directors of the holdino^ corporation elect 
 the directors of the subordinate corporations and thus are 
 able to determine the business policy of each one of its 
 subsidiary companies. Furthermore, the directors of the 
 holding corporation, through the directors of the subsid- 
 iary corporations, have the power, and generally make use 
 of it, to direct the operations of the subordinate companies 
 in accordance with the general plan of administration, pro- 
 vide for a general purchasing department, a general sales 
 department and a general accounting department, and 
 for the organization under a centralized office of all the 
 manufacturing. The holding corporation thus indirectly 
 controls not only the business policy, but the actual operat- 
 ing organization of each one of the companies in which it 
 holds a majority of the stock. 
 
 It will be noticed that the holding corporation may, by 
 extending the sphere of its influence, gain control of an en- 
 tire industry and thus become a practical monopoly. On 
 this account certain of the holding corporations have been 
 attacked under the Shennan Anti-Trust Law which de- 
 clares eveiy contract or combination in the form of a trust 
 or otherwise, or conspiracy in restraint of commerce among 
 the states, illegal. Under the authority of the Shennan 
 act, one of the most powerful of the holding corporations, 
 namely, the Northern Secunties Company, was dissolved 
 and a number of others are now before the L^nited States 
 Supreme Court for judicial decision. Wliile monopolistic 
 holding corporations may, through the activity of the Fed- 
 eral Government, be dissolved, it is apparent that unless 
 they attain a monopol}-, holding coi'porations are legal in- 
 stmments for centralizing both the proprietorship interests 
 and the operating organizations of those business enter- 
 prises which desire to associate together in this way. 
 
184 MAURICE H. ROBINSON 
 
 The Leasing Company. 
 
 In this f oral of organization one of the companies, gener- 
 ally the one in the more dominant position, leases those 
 companies with whom it seems desirable to form an organic 
 union. The lease may be either for a temporary period or 
 for so long a period that it practically amounts to a perpet- 
 ual relation. The leases are of two kinds: First, the di- 
 rect money rental, and second, the contingent lease. In the 
 first type, all of the net revenue arising from the operation 
 of the second company accrue, to the leasing company. In 
 the second type, the profits are shared between the two 
 companies in accordance with the terms of the contingent 
 lease. In either case the leasing company controls both 
 the business policy and the operating organization of the 
 company which it has leased. 
 
 The lease system has been used chiefly among rail- 
 roads, and in many cases, owing to the difficulty of fixing the 
 terms of the lease, the central company has been obliged to 
 purchase a considerable portion of either shares or bonds 
 in order to make the terms of the lease sufficiently favor- 
 able to itself. It is obvious, of course, that whenever a 
 railroad becomes involved in financial troubles, it is par- 
 ticularly easy for some stronger railroad operating in the 
 same territory to either purchase a partial interest in it 
 or advance money to it and thus be in a position to dictate 
 the terms of the lease. In the case of manufacturing and 
 commercial establishments the lease system has never be- 
 come of great importance. 
 
 The Community of Interests. 
 
 The original Standard Oil Trust was formed in 1879. 
 A group of men interested in the petroleum industry had 
 gradually purchased a partial or controlling interest in a 
 considerable number of refineries. There was thus no or- 
 ganic union between these business enterprises, but on ac- 
 
MODERN BUSINESS ORGANIZATION 185 
 
 count of common o\\Tiersliip the virtual consolidation of 
 the various companies was brouj^ht ahmit. 
 
 Such an informal organization is known as a commun- 
 ity of interests. This method of imiting business enter- 
 prises has been adopted in a considerable number of cases 
 where no direct form was found feasible. In 1902, when 
 the Northern Securities Company was dissolved by order 
 of the Supreme Court, the continuation of the control ex- 
 ercised over the general administration of the Northern 
 Pacific and the Great Northern Company was perpetuated 
 by this i^rinciple. The stock held by the shareholders of 
 the Northern Securities Company was called in and de- 
 stroyed and in return for these certificates a proportionate 
 interest in both of the companies was transferred to the 
 Northern Securities Company shareholders. Thus the two 
 companies had a common body of shareholders or a com- 
 mimity of interests. The community of interests enables 
 a common group of shareholders in several companies to 
 dominate and control the business policy of the company, 
 but ordinarily does not permit of the inauguration of a 
 centralized administration. It therefore is used only when 
 no other form of union is practicable. 
 
 The Merger. 
 
 Under certain circumstances the union of related com- 
 panies may become so complete and permanent that it is 
 thought desirable to abolish the corporate organization of 
 the subordinate companies, transfer their assets to the 
 central company and thus bring about a complete merger of 
 all of the companies in the organization into one permanent 
 union, generally in the corporate form. In such cases the 
 organization, both from the internal and the operating 
 standpoint reverts back to the original type of the ordi- 
 nary corporation. 
 
186 MAURICE H. ROBINSON 
 
 VIL BUSINESS EFFICIENCY. 
 
 Business enterprises are organized and managed, under 
 the present system of industrial economy, for the purpose 
 of earning interest and profits and ultimately distributing 
 the same in the form of cash payments to the proprietor or 
 to the partners, or in dividends to the stockholders. In 
 order to secure this end the capital contributed by the pro- 
 prietors or shareholders must be invested in land, build- 
 ings, machinery, and other equipment, and the business es- 
 tablishment thus created must be operated with business 
 as well as technical efficiency. 
 
 It will be noticed in the first place that efficient business 
 managers will not be content with turning out finished 
 goods; they wiU turn out goods that are wanted by the mar- 
 ket to which they cater. For example, it would be entire- 
 ly possible for a Parisian modiste to establish a branch 
 shop in the heart of China or Japan, stock it with the 
 choicest fabrics of the French mills, place it in charge of 
 the most expert designers and workmen and thus fashion 
 garments of wonderful beauty and style when viewed from 
 the continental point of view. But the creations of his 
 shop would, it is needless to say, be a drug upon the mar- 
 ket, while the clothes made in the native shops would find 
 ready sale at remunerative prices. The Parisian shop 
 might, it is conceivable, be operated with the greatest pos- 
 sible technical efficiency and yet be a complete failure from 
 the standpoint of business efficiency. 
 
 In the second place, the goods produced must not only 
 be adapted to the needs of the customers, but they must 
 also be limited in quantity to meet the normal requirements 
 of the market. This is the natural result of two conditions : 
 As the output of any commodity increases in quantity the 
 cost per unit decreases for a time until a point is reached 
 where the conditions of manufacture are most favorable 
 and consequently the total combined costs reach a mini- 
 
MODERN BUSINESS ORGANIZATION 
 
 187 
 
 mum. From this point on, the costs may remain constant 
 for a time, but in every case as the quantity increases be- 
 yond a certain point, the cost per unit also increases either 
 slowly, moderately, or at a rapid rate. For example, it is 
 more expensive to make one saw or one cake of soap than 
 to make saws or cakes of soap in considerable quantities. 
 After a factory has reached a certain size, however, both 
 saws and soap can be manufactured at a minimum cost. 
 After this point the cost per unit necessarily increases as 
 the materials and labor necessary for its production be- 
 come relatively more scarce and therefore more expensive. 
 Secondly, as the output increases the selling price neces- 
 sarily must be lowered until the enterprise becomes bank- 
 rupt owing to its inability to sell its output at a price equal 
 to the cost of production. This condition may be illustrated 
 by a diagram in w^hich the several factors are represented 
 by lines, as follow^s: 
 
 y 
 
 . > 
 
 3' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \b 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 < 
 
 c' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 s 
 
 s 
 
 d' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 ^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 20 
 Id 
 16 
 14 
 12 
 10 
 6 
 6 
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 s-i 
 
 
 
 
 
 
 
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 ^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 jj^ 
 
 
 
 
 
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 n^ 
 
 
 
 r""-. 
 
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 a--Z COST OF PRODUCTION CURVE 
 a--Z' PRICE CURVE 
 
 a--a', f-f'-K-k' r-r\ etc, profit per unit 
 u--u; w-v/' y-y' ETC., LOSS per unit 
 
 In the diagram the quantity produced in units per day is 
 reckoned along the base line Ox while both the cost of the 
 
188 MAURICE H. ROBINSON 
 
 goods and the selling price per unit are reckoned upon the 
 upright Oy. At first, the cost of production is high owing 
 to the disadvantages of operating on a small scale. At 
 S the minimum cost of production is reached, and after this 
 point the cost per unit steadily increases. When only a 
 small number of units is produced and sold, the price of each 
 unit, owing to its scarcity, is relatively high, and although 
 the cost of each unit is also high the profit per unit is large. 
 The unusual profits attract the attention of promoters and 
 capitalists, and consequently companies are formed and 
 plants are built for the purpose of manufacturing such 
 goods and securing a share of the abnormal profits, with 
 the double result that both the selling price and the cost 
 of production are reduced as the output increases, as sho^vn 
 in the diagram. At 95 units per day the cost equals the 
 selling price, while beyond this point the cost exceeds the 
 price which can be realized provided the entire output be 
 sold. Under such circumstances business managers gen- 
 erally withhold a part of the stock in order to maintain the 
 price above the cost of production, and shut down their 
 factories and wait until the stocks on hand are nearly ex- 
 hausted. Every increase in technical efficiency beyond a 
 certain point tends to ruin financially the industry within 
 which it occurs unless each enterprise within the industry 
 is managed with corresponding business efficiency. 
 
 In the third place, while technical efficiency may, unless 
 wisely managed, bankrupt an entire industry, such effi- 
 ciency is, in the case of individual plants within an industry, 
 one of the factors of permanent success. This results from 
 the following conditions: The output of any one of the 
 numerous plants which compose the industry is usually 
 so small in proportion to the entire output that any increase 
 in its own production does not appreciably affect the price 
 at which the goods can be sold. On the other hand, owing 
 to the fuller utilization of its plant the cost of production is 
 materially reduced. The prime object of every individual 
 
MODERN BUSINESS ORGANIZATION 189 
 
 enterprise is thus to increase its technical efficiency as well 
 as its business efficiency, since in this way the greatest profit 
 to its own proprietors is secured. When technical efficiency 
 becomes general in any industry, the profits grow gradually 
 less, and consequently more attention relatively must be 
 given to the problems which affect the industry as a whole 
 and less to those affecting individual plants. The success 
 of each individual enterprise, then, depends upon both 
 technical and business efficiency. Such efficiency is secured 
 by producing goods at the lowest ]X)Ssible cost and selling 
 them at the highest price consistent with maintaining per- 
 manent relations with the purchasers of its goods. 
 
 The Cost of Production. 
 
 In a preceding section the factors of production were 
 enumerated and the fimction of each described. These 
 factors are, it will be recalled, land, capital, labor and enter- 
 prise. In most instances the co-operation of all these fac- 
 tors is necessary for the production of commodities, and in 
 all cases such co-operation is required to secure production 
 at a low cost. It will therefore be necessary to consider 
 each of these factors from the standpoint of production and 
 find the conditions under which they co-operate most effi- 
 ciently. 
 
 Efficiency in Investment. Under the present system of 
 industrial economy the managerial class determines first, 
 the relative proportions in which land, capital and labor 
 shall be united for the puq^ose of manufacturing goods or 
 rendering services to the general market, and second, the 
 location, character and equipment of the manufacturing 
 plant. For example, assuming that a group of business 
 men come to the conclusion that automobiles are selling 
 above the cost of production, and that even if others engage 
 in this business there is likely to be an opportunity for 
 earning unusual profits, they decide to embark in this par- 
 ticular industry. They then deteiminc upon the general 
 
190 MAURICE H. ROBINSON 
 
 plan of operation, open subscription books, secure promises 
 for a sufficient amount of funds to engage in the manufac- 
 ture of motor cars, incorporate under the laws of some state, 
 elect directors, select officers, and authorize the manage- 
 ment to take the necessary steps to begin the actual manu- 
 facture of motor vehicles. Assuming further that the mini- 
 mum amount on which it is desirable to undertake this en- 
 terprise is $5,000,000, and that the total amount has been 
 subscribed, the status of the company at this time is shown 
 by the following balance sheet: 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet Before Investment, 
 
 Assets. Liabilities. 
 Subscriptions $5.000,000 Capital Stock $5,000,000 
 
 The management, composed in this case of the directors, 
 acting for the corporation upon the advice usually of the 
 executive officers, consider first the question of plant loca- 
 tion. 
 
 Location of the Plant. The first question asked will be: 
 Where is the best site on which to locate an automobile 
 factory"? The answer to this question will depend upon a 
 number of conditions all of which must be given their 
 proper consideration, such as: First, the value of a site of 
 the proper size to permit of the erection of an economical 
 factory; second, the relative cost of erecting such a factory 
 on different sites; third, the cost of raw materials at this 
 point; fourth, the cost of transporting the machines to pros- 
 pective markets; fifth, the character of the artisan class 
 in the vicinity; sixth, insurance rates in the locality; and 
 seventh, the present situation and future probabilities in 
 regard to restrictive regulations. 
 
 That location should, of course, be selected where the 
 sum of all these costs is likely to be the least, not necessarily 
 at the present time, but for a considerable period of time in 
 the future; and also where, should it be desirable to move, 
 
MODERN BUSINESS ORGANIZATION 191 
 
 the factory might be sold to the Ix'st advantage for other 
 industrial purposes. Since other manufacturers are likely 
 to be looking for the same kind of location, especially rival 
 automobile manufacturers, the contest for choice locations 
 ^vill cause the annual rent, and consequently the selling 
 value, of such sites to advance until it may be better to 
 select a location less valuable intrinsically at a lower price, 
 and thus save in rent somewhat more than is lost in the 
 higher annual cost of operation. Again, it will usually be 
 found mistaken policy to locate at a distance from both ma- 
 terials and the market, and thus burden the company with 
 heavy transportation charges, for the purpose of saving on 
 the original cost of the land. In this industry it is of course 
 not necessary to locate the factory in a large city, since the 
 company must maintain show-rooms or distriljute its pro- 
 duct through dealers located in all the important cities and 
 towns where such goods are sold. 
 
 The labor market^is of course a very different proposi- 
 tion. It takes more than one generation to develop a class 
 of skilled artisans and such a class is absolutely essential to 
 efficient production. Furthei-more, competent superintend- 
 ents usually come from the artisan class, and, while it is less 
 difficult to induce higher salaried officers to migrate from 
 one place to another, it is always a slow and usually an un- 
 satisfactory process. Consequently it is usually desirable 
 to locate in the midst of a trained body of skilled workmen. 
 The Factory. The character of the location affects in 
 an important way the kind of factory. Where land is cheap 
 the ideal factory covers a considerable area ; where land is 
 dear, the necessary floor space is secured by erecting tall 
 buildings with many stories. In the first case efficiency in 
 manufacturing can be secured only by so arranging the 
 factory that the processes or steps in the manufacturing 
 may form a connected chain from the tracks on which the 
 raw material is received through the factory to the assem- 
 bling room, and finally to the track on which the finished 
 
192 MAURICE H. ROBINSON 
 
 machines are shipped to the warehouses or to the various 
 show-rooms where they are to be sold. In the second case 
 the transportation problem is solved more largely through 
 the elevator system, although a proper arrangement of the 
 floors and the spaces in each is important. Owing to the 
 well-known fact that the cost of erecting a factory with a 
 given floor space increases with the added stories, after a 
 certain height is reached, the actual cost of a building of a 
 given capacity, as well as the land upon which it is located, 
 is likely to be greater in. a city than in the country. Con- 
 sequently the site must offer sufficient attractions in the 
 way of cheaper material, cheaper labor, or a better market, 
 to offset this handicap. On the other hand, the higher the 
 building the less relatively is the cost of the land. Conse- 
 quently, manufacturers, after determining upon the loca- 
 tion, must decide upon the relative amount of capital to 
 invest in the land as compared with that invested in the 
 building. In a growing city additional land usually costs 
 more than the extra cost of additional floor space in the 
 upper stories. Therefore when the operations of a factory 
 can be economically conducted in a high building, the man- 
 agement should provide for such a structure. Where the 
 operations can be more economically carried on upon the 
 ground floor, the management should hesitate long before 
 loading all future products with the handicap that comes 
 from manufacturing in a building not suited to the industry. 
 Character of the Building. Irrespective of the shape, 
 whether low and broad or narrow and high, the character 
 of the structure is a matter of first importance. From the 
 technical point of view the factory should be perfectly 
 adapted to the purposes for which it is intended and con- 
 structed so that annual repairs, danger from fire and other 
 hazards, are reduced to a minimum. From the business 
 standpoint, however, other considerations must enter in, 
 some of which may materially modify the conclusions 
 reached above. Ordinarily the better the structure, the 
 
MODERN BUSINESS ORGANIZATION 193 
 
 more capital must be put into tlio ])nil(linp^ and ronsequently 
 less will be left for equipment and operation. ^Foreover, 
 commerce and industry are subject to changes wliicli are im- 
 possible to be foreseen, and therefore cai)ital once invested 
 in a factory may, in the course of a comparatively few years, 
 prove to have been either unfortunately located or unsuited 
 to the particular business for which it was intended. Such 
 capital is partially, at least, wasted and from the purely 
 business standpoint the profits of the industry mip^ht have 
 been increased by the full amount of the wasted capital by 
 erecting an equally convenient factory, warehouse, etc., 
 etc., at less initial expenditure. 
 
 Wliere the business is likely to be peraianent, and where 
 the location selected is also likely to be as well adapted to 
 the purposes of the company in the future as at the present 
 time, the business and the technical ideas in regard to a 
 proper building are identical. In all other cases a technic- 
 ally pei-fect building must be sacrificed and such a structure 
 erected as is likely to secure the greatest possible business 
 efficiency. 
 
 Size of the Building. It will be assumed that whatever 
 the size of the factory the building will be fully utilized and 
 consequently the annual product of the company is stiictly 
 limited by the size of its plant. On this account it is neces- 
 sary to detei-mine in advance the number of units, in this 
 case the nimiber of motor cars, which must be manufactured 
 annually in order to secure the lowest practi(^al c(^st of pro- 
 duction. Let us assume that the number is found to be ap- 
 proximately 5,000 cars; then the factory with a capacity 
 sufficient to enable the company to turn out at least that 
 number should be planned. However, it is usually desirable 
 to build somewhat larger than present conditions demand 
 for the following reasons: 
 
 1. The sale of manufactured articles of each class, 
 especially of recently introduced articles, is likely to in- 
 
 B.II— 13 
 
194 MAURICE H. ROBINSON 
 
 crease somewhat faster than the increase in population of 
 the adjacent country. 
 
 2. That improvements in manufacturing processes and 
 the size of the factory giving the most economical produc- 
 tion, are likely to increase rather than the reverse. 
 
 3. It is usually more economical to build a plant with 
 the maximum capacity required during a period of say ten 
 years in advance rather than to make periodical additions 
 to meet the needs of the growing industry. 
 
 4. The inability of any manufacturer to take care of 
 all the business that comes to him, as a result of an unusual 
 demand for the goods he produces, causes his customers 
 inconvenience and often business losses, and this condition 
 leads to the establishment of rival plants, increasing the 
 competition and lessening profits. 
 
 The Equipment. It is needless to say that business, as 
 well as technical efficiency, usually demands the best equip- 
 ment that the market affords. There are, however, limita- 
 tions to this generally accepted maxim. In making use of 
 his factory every manufacturer has an option between the 
 two following methods : He may install more labor-saving 
 machinery and correspondingly lessen his labor force and 
 his annual payroll; or, he may do without such machinery 
 and appliances and increase the number of men employed, 
 thus saving in the use of capital while increasing the wage 
 element in his annual charges. 
 
 From a purely technical point of view the company will 
 choose whatever course will provide the most perfect 
 articles. From the standpoint of business efficiency, how- 
 ever, the manufacturer finds that, while perfect goods usu- 
 ally do not pay, it is often possible to make large profits by 
 turning out inferior articles. Although machinery may not 
 be able to compete with the skilled artisan in quality, it may 
 so far outstrip him in quantity that its use is absolutely 
 necessary for business success. In still other cases the ma- 
 chine is absolutely necessary for the manufacture of certain 
 
MODERN BUSINESS ORGANIZATION 195 
 
 kinds of goods. For example, cotton and woolen clothes, 
 steel rails, and certain other products of iron and steel, 
 some products of rubber, etc., etc. In such cases the man- 
 agement must invest in the necessary machinery in order to 
 manufacture the goods at all. The efficient business man- 
 ager will invest in machines of a character that, con- 
 sidering the total capital invested, the location and kind of 
 building, the character of the workmen and the rate of 
 wages, will in the long run yield the greatest possible rate 
 of profits. 
 
 In addition to machinery, business establishments re- 
 quire a considerable investment in tools and in this case the 
 best usually give the best business results. AA^ile it is pos- 
 sible to economize in the location of the plant, and in many 
 cases in the machinery, it is always bad business policy to 
 use cheap tools. Moreover, it is also usually bad business 
 policy to economize too much in the number of tools. Both 
 the shop and the office should be supplied with an adequate 
 quantity of the best tools in order to secure business effi- 
 ciency. 
 
 A third line of equipment, often neglected at the expense 
 of future earning power, is the transportation facilities 
 wuthin the plant. These involve not only elevators, which 
 are usually well provided, but traveling cranes, tracks, cars 
 and other conveniences for the conveyance of tools, mate- 
 rials, and partially finished product from the point of re- 
 ceipt, through the warehouse, to the factory and to the rail- 
 road or street for delivery to the purchaser. Fortunately 
 a part of the equipment can be erected on the installment 
 plan, without serious disadvantages. For example, cranes, 
 machines, etc., etc., can be purchased as needed, and placed 
 in position for operation as needed, provided the factory 
 has been organized with this plan in view, thus savine: ap- 
 preciably in the initial investment of capital. The ideal 
 factory will not only be provided with the most convenient 
 transportation facilities for the rapid movement of ma- 
 
196 MAURICE H. ROBINSON 
 
 terials, tools, etc., but will also be so arranged as to reduce 
 the actual amount of transportation within the factory to 
 the least possible terms. Some recent factories ai'e models 
 in this respect. 
 
 Power, Heat and Light. Power, heat and light may be 
 furnished either by the company itself, or in many cases 
 produced by some other company whose business is that of 
 producing these commodities for sale. When heat, light 
 and power can be purchased, the efficient business manager 
 will choose the method that enables him to produce his 
 goods at the least j)ossible cost. Fortunately it is usually 
 possible to determine this question at the time the plant 
 is being erected and thus to avoid the waste caused by 
 equipping the plant for furnishing one or all of these com- 
 modities and then finding that it is less expensive to buy 
 the same of some comj)any that is established and fitted up 
 for that iDurpose. To make the proper comparison it is of 
 course necessary to charge to this department not only 
 the cost of actual repairs, depreciation, materials and 
 labor consumed, but its proportion of the administra- 
 tion expenses, ground rent, and interest on investment. 
 Having from these items calculated the actual cost, they 
 should then find the annual expense of buying the same 
 from other companies which supply these articles. The 
 efficient manager will of course choose the less expensive. 
 In either case, the arrangement of the factory, for the pur- 
 pose of securing proper lighting for the machinery must 
 be taken into consideration. 
 
 Investment Accounting. 
 
 Applying the general principles stated in the preceding 
 sections let us assume that for the purposes of the corpora- 
 tion the directors find that the proper location will cost 
 $250,000, that the buildings will require an additional $750,- 
 000, and that it is more economical to manufacture the 
 power than to buy it, and that on this account the total 
 
MODERN BUSINESS ORGANIZATION 197 
 
 equipment including; niacliiiiorv, furnaces, hollers, office 
 fixtures and furniture, will necessitate an investment of 
 $1,000,000. After the land is purchased and the huilding 
 erected and equipped the following balance sheet shows tlie 
 condition of the corporation from the purely investment 
 standpoint. 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet After Investment of iMxed Capital. 
 
 Assets. Liabilities. 
 
 Land at cost " $ 250.000 Capital Stock $5,000,000 
 
 Buildings at cost 750.000 
 
 Equipment at cost 1,000,000 
 
 Subscriptions 3,000,000 
 
 Total .$5.000.0 00 $5.000,000 
 
 The balance sheet as shown above while entirely correct 
 from the investment point of view is wholly inadequate for 
 the purposes of determining business efficiency. Since the 
 company is undertaking a variety of functions, it is neces- 
 sary to further subdivide and re-arrange the accounts for 
 the purpose of showing the total investment in each of the 
 following lines: 
 
 1. The Office. 4. Warehouse for storing raw ma- 
 
 2. The Factory. ^ Warehouse for storing finished 
 
 3. The Power Plant. goods. 
 
 Further, in many cases it is necessary to subdivide the 
 factory into its natural divisions on the basis of the work 
 carried on within its various parts, and to charge each of 
 these divisions with its share of the total investment. This 
 allotment should ])e made on the basis of a^ aial cost, so far 
 as possible, and wherever this method is not feasil)le, on the 
 basis of space, location and character of building. After 
 
198 MAURICE H. ROBINSON 
 
 this division has been made the balance sheet will appear as 
 follows : 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet Showing Investments on Efficiency of Business Basis. 
 
 Assets. Liabilities. 
 
 Office Investment $60,000 Capital Stock $5,000,000 
 
 Land $ 10,000 
 
 Buildings 25,000 
 
 Equipment 25,000 
 
 Factory Investment 1,500,000 
 
 Land 150,000 
 
 Buildings 550,000 
 
 Equipment 800,000 
 
 Power Plant 165,000' 
 
 Land 15,000 
 
 Buildings 50,000 
 
 Equipment 100,000 
 
 Warehouse No. 1 175,000 
 
 Land 50,000 
 
 Building 75,000 
 
 Equipment 50,000 
 
 Warehouse No. 2 100,000 
 
 Land 25,000 
 
 Building 50,000 
 
 Equipment 25,000 
 
 Subscriptions 3,000,000 
 
 $■'^■000.000 $5,000.000 
 
 Whenever it is desirable to test the efficiency of any 
 branch of the factory this principle of apportioning the in- 
 vestment to the various parts must be applied, assigning to 
 each part its share in the total investment. 
 
 Raw Materials. 
 
 It has been assumed in the foregoing discussion that the 
 corporation proposes to purchase its materials in the un- 
 finished state from other producers and consequently needs 
 storage room only. Within the past fifty years, however, in 
 many industries, it has been found desirable to own the 
 source of the chief raw materials used, and consequently 
 manufacture the more important parts which enter into 
 the finished product. Whether or not this method of obtain- 
 ing material conforms to the standards of business effi- 
 ciency depends upon the relative cost of such articles to 
 
MODERN BUSINESS ORGANIZATION 199 
 
 the corporation. Hence it is necessary whenever this plan 
 is followed to keep the investment in mines, forests, etc., 
 entirely separate and treat each of these })ranehes of the 
 business exactly as if it were an independent establishment. 
 In this way the cost of furnishing the company with its 
 iron, coal, lumber, and other materials in the natural state, 
 and of converting them into the form necessary for use in 
 the factory, can be determined, and such cost compared 
 ^^'ith the ruling price for such articles in the open market. 
 
 It is obvious that this method, w'hile theoretically pos- 
 sible in all classes of industries, has from the practical point 
 of view narrow limitations. This method is clearly impos- 
 sible in the flour milling industry since it would necessitate 
 the operation of sufficient fann acreage to grow the wheat 
 milled by each company. Such a practice would involve 
 one of two difficulties : Either each milling company would 
 be obliged to operate small mills and thus fail to secure the 
 economies resulting from milling on a large scale; or each 
 would be obliged to engage in wheat farming on an exceed- 
 ingly extensive scale and thus suffer the natural penalties 
 of operating a business over an extended area with conse- 
 quent loss in business efficiency owing to diffused manage- 
 ment with its inherent wastes. ^Moreover, since wheat 
 lands yield the best results when other crops are rotated 
 w^ith wheat, the company would be compelled to lease and 
 operate its land periodically, or it must either own the 
 wheat land and subrent to other persons for a part of the 
 time, or undertake the manufacture and sale of the crops 
 which are grown upon the land in the years when it is 
 found undesirable to grow wheat. Since all of these alter- 
 natives are impracticable, flour milling and other similar 
 industries are disbarred from adopting this method of pro- 
 curing raw material. It is only when some one of the sev- 
 eral classes of raw material is used in large quantities, and 
 when such materials are fairly unifonn in quality, that this 
 method can be wisely adopted. Steel manufacturers have 
 
200 MAURICE H. ROBINSON 
 
 in most cases found it expedient to own both iron and coal 
 mines and thus furnish the two most important materials 
 for their operations. Even in the steel business, however, 
 the fear that rival mauufactiu'ers might secure control of 
 the best available sources of supply and thus monopolize 
 the whole material of the industry, has been one of the 
 principal incentives to its adoption. 
 
 Provided the supply of raw material can be safeguarded 
 from monopolistic control, it is an open question whether 
 there would be a gain in real business efficiency as a result 
 of the steel manufacturers engaging in the entirely different 
 occupation of mining coal and iron. In most industries 
 the production of all the various parts that enter into the 
 finished product is controlled directly by the accepted 
 principles of business as well as technical efficiency. The 
 automobile industry clearly belongs with the general class, 
 and consequently we may assume that our company will 
 not engage in the work of manufacturing its parts from the 
 ground up, but will purchase from specialists in the various 
 lines many of the component materials which go to make 
 the completed machines. Hence the stock of materials in 
 the various stages of manufacture, up to and including the 
 finished cars, will be fairly large, and a portion of the cash 
 coming from subscriptions will, before the beginning of 
 operations, be needed for this purpose. Assuming for il- 
 lustration that at least $2,000,000 mil be tied up in this 
 way, the condition of the company when fully under way is 
 represented by the follomng balance sheet. 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet After Operations Are Begun. 
 
 Assets. Liabilities. 
 
 Office Investment $ 60,000 Capital Stock $5,000,000 
 
 Factory In-vestment 1,500,000 
 
 Power Plant 165,000 
 
 Warehouse No. 1 175,000 
 
 Warehouse No. 2 100,000 
 
 Materials, raw, partially fin- 
 ished, and finished 2,000,000 
 
 Cash 1,000,000 
 
 $5,000,000 $5.000.000 
 
MODERN BUSINESS ORGANIZATION 201 
 
 To make the above assumptions conform more closely 
 to the actual conditions of the ordinary oporatino: coi"]iora- 
 tions one step further must he taken. Business corpora- 
 tions usually ])uy and sell, partially at least, on credit both 
 materials and labor. Hence it will be necessary to intro- 
 duce credit accounts to make our investment conform to 
 actual conditions. Since every efficiently manaj^^ed com- 
 pany pays its bills promptly and takes its discounts, while 
 at the same time collecting as closely as commercial con- 
 ditions will pennit, we shall assume that the automobile 
 company belongs to this class. Accordingly its accounts 
 and bills payal)le amount to only $500,000, its unpaid wage 
 account to $50,000, against which there is an offset of $600,- 
 000 for accounts and bills receivable representing cars sold 
 but only partially paid for. The balance sheet after be- 
 ginning operations will then be as follows: 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet During Operation. 
 
 Liabilities. 
 Capital Stock $5,000,000 
 
 Accounts and bills payable. 500,000 
 
 Accrued wages 50,000 
 
 Surplus 50,000 
 
 Assets. 
 Office Investment 
 
 
 .$ 60,000 
 
 Factory Investment . . . 
 
 
 . 1,500,000 
 
 
 
 165,000 
 
 
 
 175,000 
 
 YVarehouse No 2 
 
 
 100,000 
 
 Materials, raw, partially fin 
 ished and finished 
 
 Accounts and Bills Receiv 
 able 
 
 . 2,000,000 
 . 600,000 
 
 Cash 
 
 
 . 1,000,000 
 
 
 
 
 
 S.--). 600,000 
 
 $5,600,000 
 I r 
 
 Efficiency of Operation. 
 
 With a plant wisely located, properly constructed and 
 equipped for j^roducing a marketal)le article or articles, the 
 problem of business efficiency centers around the operation 
 of the esta])lishment, the production of saleable commodities 
 and the disposal of sueh conunodities at the best possible 
 price. The first two of these problems deals largely with 
 
202 MAURICE H. ROBINSON 
 
 the labor question, while the third is chiefly concerned with 
 making the price. 
 
 The Labor Problem. 
 
 When a man works for himself he receives directly the 
 entire product of his labor. He thus has every possible in- 
 centive except the lash to work regularly and efficiently. 
 Under the present system, however, the great majority of 
 men sell their labor for a stipulated price to others who in 
 turn operate the business in which they are employed and 
 sell the joint products of labor and capital in the open mar- 
 ket. The reward of the laborer is thus only indirectly de- 
 pendent upon the character and quality of his work, and 
 thus the workmen from the highest salaried officials to the 
 unskilled laborers have too little incentive to become effi- 
 cient in their daily tasks. 
 
 To secure efficiency, then, some method of inducing men 
 to work for others with the same intelligence, skill and en- 
 thusiasm as they work for themselves is highly desirable 
 and absolutely necessary to the most successful operation 
 of any business. The methods in actual use by which effi- 
 ciency on the part of hired employes may be stimulated are 
 separated into two principal classes: First, those which 
 drive men to do their work, and second, those which hold 
 out some reward other than the regular wages as an in- 
 ducement to more efficient work. 
 
 1. The driving method demands both a strong, highly cen- 
 tralized, semi-military organization and also keen competi- 
 tion among the workingmen for positions in the industrial 
 army. The first of these conditions is found in many in- 
 dustrial establishments at the present time. The higher 
 officials are in most organizations heavily interested in the 
 financial success of the enterprise and hence have every 
 possible incentive to maintain an efficient organization for 
 the purpose of driving the officials directly under them to 
 secure results. To this end each department head is made 
 
MODERN BUSINESS ORGANIZATION 203 
 
 directly responsible to the central authorities and the work 
 under each department is separated into divisions under 
 managers directly responsi])lo to the do])artment liead. The 
 division managers then demand results fr(.)m their subor- 
 dinates and such subordinates in turn from the shop fore- 
 man, bosses, and other men directly in charge of the work 
 in process. Any department head who cannot show results 
 is pnmiptly discharged and one who promises to show great- 
 er efficiency is given his position. The same process is 
 carried out down through the ranks until the whole or- 
 ganization, from the highest official to the humblest laborer, 
 is kept at concert pitch. 
 
 To deteiTnine the relative efficiency of each department 
 and of each branch of the various departments, elaborate 
 cost records are kept and by comparison of such accounts 
 the relative efficiency of various departments and conse- 
 quently of the head and of all the men employed in a depart- 
 ment, is determined. 
 
 The success of the driving method is dependent upon 
 the ability of managers to discharge officials and working- 
 men and find more efficient men to take their places. The 
 process is thus dependent upon active competition among 
 officials and men for the positions vacated l)y the discharged 
 employes. Among the men in executive positions this pro- 
 cess has ahvays worked effectively, but among skilled la- 
 borers it has in most cases ceased to have its former im- 
 portance. This condition is the direct result of the or- 
 ganization of laborers into unions for the very purjDose of 
 preventing competition among themselves, thus preventing 
 the driving process from working effectively wherever 
 labor unites in regular organizations. For this reason the 
 military method of securing efficiency has become much less 
 effective among the wage class than among the higher 
 officials, and it has been found advisable in many cases to 
 supplement it by various plans for rewarding the more 
 efficient workmen. 
 
204 MAURICE H. ROBINSON 
 
 2. The reward method of securing efficiency has sev- 
 eral important varieties, all with a common purpose, name- 
 ly to reward men working on a salary, or at wages, in pro- 
 portion to the actual value of the products which they turn 
 out. These methods may be divided into the following 
 classes: The piece wage system, the bonus and premium 
 system, the profit sharing system, the pension system, and 
 finally the system of offering shares in o^^^lership either by 
 giving such shares outright or by selling them to employes 
 at less than the market price. 
 
 The Piece Wage System. Tliis system has obvious ad- 
 vantages for the purpose of securing efficiency in certain 
 kinds of work, but its application is narrowly limited. Its 
 first effect is to secure an increased output at the sacrifice 
 of quality, and thus cause the price of the article manu- 
 factured to fall rapidly, first because the quality has de- 
 teriorated and second because the market supply is increas- 
 ing. To check the first tendency the management is obliged 
 to introduce an expensive system of inspection which of it- 
 self prevents the workingman from getting the full benefit 
 of his increased efficiency. As the output increases vdth 
 the increase of efficiency, the number of laborers must 
 necessarily be reduced and the price of the article lowered. 
 In the first case the piece wages fall owing to the increased 
 competition among the laborers, and in the second case the 
 same reduction is caused by the lowering of the selling 
 price. The results of the piece wage system on the piece 
 rate are so well known that its effectiveness in stimulating 
 efficiency is to a considerable extent neutralized. More- 
 over it is applicable only when the work is of a routine 
 nature and where the test for quality can easily and ac- 
 curately be applied. Hence other means of stimulating 
 efficiency must be sought in all other cases. 
 
 A modification of this system, called the differential 
 piece rate system, was devised and put in operation at the 
 JVIidvale Steel Works about twenty years ago, by Mr. F. W. 
 
MODERN BUSINESS ORGANIZATION 205 
 
 Taylor. The differential piece rate system estahli.slied a 
 (loii])le system of piece rates vai-yin^ with the output for 
 the day — a hif,di rate for a certain delinite large output and 
 a lower rate for a smaller number of pieces. This plan put 
 a still larger premium upon the volume of production ])ut 
 was, of course, open to all of the objections and subject to 
 all tlio limitations whicli inhormtly Ix'long to that plan. 
 
 The Bonus and Premium Systems. The bonus system 
 developed out of the piece rate system and was devised for 
 the purpose of securing the objects which the other systems 
 of wage joa^Tnents aimed at but failed to accomplish. Tt 
 was introduced at the Bethlehem Steel Company works in 
 1900, lit the suggestion of Mr. H. L. Gantt, who was at that 
 time working with Mr. Taylor for the purpose of increasing 
 the efficiency of labor. Mr. Taylor had been occupied in 
 rearranging the main machine shop to facilitate its oper- 
 ation by placing machines of the same character together, 
 thus standardizing the work and simplifying its super- 
 vision and paving the way for the differential piece rate 
 system which at that time was considered the best plan 
 for securing a large output. 
 
 While waiting for conditions under whicli the differen- 
 tial piece rate system could properly be introduced, ^Ir. 
 Gantt 's plan was adopted. It consisted in giving a bonus 
 of fifty cents per day to eacli working man who accom- 
 plished in that time all the work that his instructions called 
 for. To secure the co-operation of the gang boss and the 
 speed boss, the superintendent of the machine shop, Mr. E. 
 P. Earle, suggested the payment to each of these officials of 
 an additional bonus for each of his men who earned a bonus 
 and later a second additional bonus, provided all the men 
 under the charge of any one of the bosses succeeded in earn- 
 ing bonuses. After two months' trial the assistant super- 
 intendent of the machine shop reported as follows: "One 
 of the best results .... has been the moral effect 
 Upon the men. They have had it X)laced in their X3ower to 
 
206 MAURICE H. ROBINSON 
 
 earn a very substantial increase in wages by a correspond- 
 ing increase in their productive capacity and this has given 
 them a feeling that the company is quite willing to reward 
 the increased effort. . . . The percentage of errors in 
 machining has been reduced. . . . The condition of the 
 machines is vastly improved. . . . It is only by the 
 introduction of the bonus plan that we have had furnished 
 an automatic incentive for men to work up to their capacity 
 and to obtain from the machines the product which they are 
 capable of turning out. It has lifted the hands of the speed 
 bosses (foremen) and enabled them to act in the capacity 
 for which these positions were created — that of instruct- 
 ors." 
 
 The bonus plan had one element of weakness which was 
 soon discovered and corrected. This weakness arose from 
 the fact that no incentive was given skilled workmen after 
 they had earned their bonuses. Consequently after some 
 modification a plan was adopted by which a workman was 
 paid for the time allowed plus a percentage for that time. 
 This gave an incentive for the best men to do as much work 
 as possible while assuring the slower ones of a minimum 
 rate per day. 
 
 The premium system was devised by Mr. F. A, Halsey 
 and was first described in a paper read before the American 
 Society of Mechanical Engineers, in 1891. The basis of 
 this, as of all other premium systems, is a fixed standard 
 time for standard work, with a regular wage for the same, 
 established as a result of actual performance by various 
 workmen. The employes who do the standard work in less 
 than the standard time are given a premium based upon 
 the saving of time. For example, the Halsey method origi- 
 nally allowed the workman a premium of one-half the 
 time saved. Hence at a wage of 30 cents per hour and a day 
 of ten hours, the workman who accomplished his standard 
 work in eight hours received $2.40 plus one-half of sixty 
 cents, or $2.70 a rate of 33.7 cents per hour for the standard 
 
MODERN BUSINESS ORGANIZATION 207 
 
 task. A modification of the llalsey plan allows the work- 
 man one-third of the time saved. The details of the llalsey 
 plan are showTi in the following table : 
 
 The Halsey Method 
 Workman to receive one-half of time saved. Standard time — 10 Hours. 
 
 Hours 
 
 Regular 
 
 Earnings at 
 
 i time 
 
 Premium 
 
 Total 
 
 Earnings 
 
 worked 
 
 rate 
 
 reg. rate 
 
 saved 
 
 earned 
 
 earnmgs 
 
 per hour 
 
 10 
 
 $0.30 
 
 $3.00 
 
 
 
 $3.00 
 
 $0.30 
 
 9 
 
 .30 
 
 2.70 
 
 i hour 
 
 $0.15 
 
 2.85 
 
 .316 
 
 8 
 
 .30 
 
 2.40 
 
 1 hour 
 
 .30 
 
 2.70 
 
 .337 
 
 7 
 
 .30 
 
 2.10 
 
 lA hours 
 
 .45 
 
 2.55 
 
 .364 
 
 6 
 
 .30 
 
 1.80 
 
 2 hours 
 
 .60 
 
 2.40 
 
 .40 
 
 5 
 
 .30 
 
 1.50 
 
 2i hour.s 
 
 .75 
 
 2.25 
 
 .45 
 
 4 
 
 .30 
 
 1.20 
 
 3 hours 
 
 .90 
 
 2.10 
 
 .525 
 
 3 
 
 .30 
 
 .90 
 
 3* hours 
 
 1.05 
 
 1.95 
 
 .65 
 
 2 
 
 .30 
 
 .60 
 
 4 hours 
 
 1.20 
 
 1.80 
 
 .90 
 
 1 
 
 .30 
 
 .30 
 
 4i hours 
 
 1.35 
 
 1.G5 
 
 1.05 
 
 The Rowan method was originally proposed by Mr. 
 James Rowan of Glasgow, Scotland, in 1901. This makes 
 the premium a percentage of the time saved. The work- 
 man is given the same percentage of the regular time as the 
 time saved bears to the time allowed. Thus under the same 
 conditions as stated in connection with the Halsey method, 
 the workman who saves two hours receives 20 per cent of 
 the time saved, or 20 per cent of $2.40, or $2.88 for eight 
 hours' work, which is a rate of 36 cents per hour. The de- 
 tails of the Rowan j^remium plan are shown in the following 
 table : 
 
 The Rowan Method 
 
 Workman to receive same per cent of regular time as time saved bears to 
 time allowed. Standard time — 10 Hours. 
 
 
 
 
 
 % of Time 
 
 Premium on 
 
 
 Earnings 
 
 per 
 
 Hour 
 
 Hours 
 
 Regular 
 
 Earnings at 
 
 Time 
 
 Saved to 
 
 Basis of 
 
 Total 
 
 Worked 
 
 Rate 
 
 Reg. Rate 
 
 Saved 
 
 Time 
 
 Same % of 
 
 Earninp^ 
 
 
 
 
 
 Allowed 
 
 Reg. Time 
 
 $3i)0~ 
 
 10 
 
 $0.30 
 
 $3.00 
 
 
 
 
 $0.30 
 
 9 
 
 .30 
 
 2.70 
 
 1 hr. 
 
 107o 
 
 $0.27 
 
 2 97 
 
 .33 
 
 8 
 
 .r'.o 
 
 2.40 
 
 2 hrs. 
 
 20% 
 
 .48 
 
 2 '^8 
 
 .36 
 
 7 
 
 .30 
 
 2.10 
 
 3 hrs. 
 
 30% 
 
 .63 
 
 2.73 
 
 .39 
 
 6 
 
 .30 
 
 1.80 
 
 4 hrs. 
 
 40% 
 
 .72 
 
 2.52 
 
 .42 
 
 5 
 
 .30 
 
 1.50 
 
 5 hrs. 
 
 50% 
 
 .75 
 
 2.25 
 
 .45 
 
 4 
 
 .30 
 
 1.20 
 
 6 hrs. 
 
 60% 
 
 .72 
 
 1.92 
 
 .48 
 
 3 
 
 .30 
 
 .90 
 
 7 hrs. 
 
 70% 
 
 .63 
 
 1.53 
 
 .51 
 
 2 
 
 .30 
 
 .60 
 
 8 hrs. 
 
 80% 
 
 .48 
 
 1 08 
 
 ..'>4 
 
 1 
 
 .30 
 
 .30 
 
 9 hrs. 
 
 90% 
 
 .27 
 
 ..')7 
 
 ■■" 
 
208 
 
 MAURICE H. ROBINSON 
 
 A third modification of the premium plan was devised by 
 Mr. Harrington Emerson and adopted by the Santa Fe Rail- 
 road in their railroad shoj^s. The Emerson method rates 
 the workman who aecomiDlishes his task in standard time at 
 100 per cent efficiency, and begins to award a premium 
 whenever the workman exceeds 66 2-3 per cent efficiency. 
 The premium increases gradually until the standard time 
 of 100 per cent efficiency is reached, at which point it is 
 twenty per cent of the wages. After 100 per cent efficiency 
 is reached the premium increases at the rate of one per cent 
 for every one per cent of increase in efficiency. The details 
 of the Emerson plan are shown in the following table: 
 
 The Santa Fe, or Emerson Method 
 
 Standard Time — 6 Hours 40 Minutes. 
 
 Hours 
 
 Regular 
 
 Earnings at 
 
 Efficienc) 
 
 Premium 
 
 Total 
 
 Earnings 
 
 Worked 
 
 Rate 
 
 Reg. Rate 
 
 Per Cent 
 
 Earned 
 
 Earnings 
 
 per Hour 
 
 10 
 
 $0.30 
 
 $3.00 
 
 677o 
 
 • . . • 
 
 $3.00 
 
 $0.30 
 
 9 
 
 .30 
 
 2.70 
 
 74% 
 
 $0.03 
 
 2.73 
 
 .303 
 
 8 
 
 .30 
 
 2.40 
 
 83% 
 
 .12 
 
 2.52 
 
 .315 
 
 7 
 
 .30 
 
 2.10 
 
 95% 
 
 .31 
 
 2.41 
 
 .344 
 
 6 
 
 .30 
 
 1.80 
 
 111% 
 
 .56 
 
 2.36 
 
 .393 
 
 5 
 
 .30 
 
 1.50 
 
 133% 
 
 .80 
 
 2.30 
 
 .46 
 
 4 
 
 .30 
 
 1.20 
 
 167% 
 
 1.04 
 
 2.24 
 
 .56 
 
 3 
 
 .30 
 
 .90 
 
 222% 
 
 1.28 
 
 2.18 
 
 .726 
 
 2 
 
 .30 
 
 .60 
 
 333% 
 
 1.52 
 
 2.12 
 
 1.06 
 
 1 
 
 .30 
 
 .30 
 
 667% 
 
 1.76 
 
 2.06 
 
 2.06 
 
 The premium plans described above have been modified 
 by adding other features or combining the features of two 
 or more into one. The Cardullo method fixes a maximum 
 rate beyond which a premium cannot be earned. Some- 
 times the Halsey method is combined with the Rowan 
 method and still other combinations are sometimes adopted. 
 All of the various modifications of the original premium 
 plans seem to have been devised to prevent the most skilled 
 workmen from receiving the full benefits of the premium 
 system. They differ chiefly in one point, namely, the rate 
 at which the wage payment per hour increases with the in- 
 crease of efficiency. 
 
MODERN BUSINESS ORGANIZATION 209 
 
 The preniium ])laii usually includes a bonus to the sup- 
 erintendents and t'orenieu bascnl upon the elheieney attained 
 by the workmen directly under their charge. In this re- 
 spect it follows the Gantt bonus system as described above. 
 The premium plan of wage paj-ment is based upon two 
 sound business pi-inciples: First, that the employe work- 
 ing either on a salary or for wages is entitled to l)e paid in 
 proportion to the work done rather than on the basis of the 
 time consumed; second, that a company can afford to pay 
 for the saving of time owing to the consequent reduction 
 in that part of the cost of production due to a better utiliza- 
 tion of the plant and machinery. Its extended use is, how- 
 ever, limited seriously by the following circumstances, any 
 or all of which may prevent its adoption in particular 
 cases: 
 
 First, in certain kinds of work it is impossible to fix a 
 standard task as a day's work. 
 
 Second, the imions are generally opposed to the plan 
 since it is contrary to one of the principles of unionism, 
 namely, equal rates per day for work of the same char- 
 acter. 
 
 Third, the cost and difficulties inherent in its administra- 
 tion. 
 
 The first two points need little discussion. It is evident 
 that it is practicable to devise a standard task only when 
 the work is of a routine character. For example, while 
 spinning and weaving would afford an excellent field for 
 its adojDtion, it would be manifestly impracticable in all 
 kinds of repair work, in all special work, and in all cases 
 where the work of employes is dependent upon others over 
 which they have no control. In the second place, the prin- 
 ciples being directly contrary to the ideals of trade union- 
 ism, it is likely to cause labor troubles and strikes wherever 
 unionism is at all strong. In the third i)lace, the premium 
 plan is dependent upon an elaborate organization and a 
 management of the highest efficiency. And even where these 
 
 B.II— 14 
 
210 MAURICE H. ROBINSON 
 
 features are found its practical operation and permanent 
 success requires an accounting sj^stem able to administer its 
 details fairly and accurately, so fairly that the various em- 
 ployes may not feel that they are being cheated out of their 
 rights, and so inexpensive that the company may receive 
 some additional profits after its cost of administration is de- 
 ducted from the total profits accruing from the increased 
 efficiency of the plant, machinery and workmen. 
 
 In certain cases, for example, in the Midvale and Bethle- 
 hem steel works, and in the Santa Fe railroad shops, etc., 
 the premimn plan has, notwithstanding serious labor 
 troubles, been exceedingly successful. In other cases, ow- 
 ing partly to circumstances not necessarily connected with 
 the system, it has proved a complete failure. Its adoption, 
 then, must be considered in the light of the special circum- 
 stances which surround each company, and whenever the 
 conditions are right, it is sure to prove successful by in- 
 creasing the efficiency of labor and in that way of the com- 
 pany as a whole. 
 
 Profit Sharing. Under the premium plan the workman 
 receives an addition to his wages whenever he increases his 
 own efficiency. In profit sharing, on the contrary, any ad- 
 dition to his wages is dependent upon the business efficiency 
 of the whole enterprise. It is, of course, entirely practic- 
 able to combine these two systems, in which case it might 
 result that the individual workman would be receiving 
 premiums for his own efficiency while the company was be- 
 coming bankrupt on account of its own inefficiency. On the 
 other hand, there would be other cases in which, while none 
 of the workmen earned a premium for efficient service, the 
 company might be making large profits. 
 
 Profit sharing, unlike the premium system, is capable 
 of universal adoption. Its acceptance is dependent upon 
 the willingness of employers to put it in force and of the 
 employes to accept its provisions. It has therefore been de- 
 fined as "A voluntary agreement by virtue of which an em- 
 
MODERN BUSINESS ORGANIZATION 211 
 
 ploye receives a share fixed beforehand in the profits" of 
 the enterprise by wliich he is employed. 
 
 Profit sharing was introduced into England as early as 
 1832 and in France ten years later. Notwithstanding its 
 early adoption, its practical success, measured by its actual 
 use, has been disappointing. In England where the system 
 has been most extensively used, it is estimated that less 
 than 100,000 workmen are enjoying its benefits at the pres- 
 ent time. In the United States this method has made little 
 progress, although in some cases it has met with remark- 
 able success, viewed from the standpoint of the employer 
 as well as that of the employe. 
 
 The causes of this condition are worthy of consideration 
 from the viewpoint of business efficiency. It was originally 
 thought that profit sharing would enlist the employe on 
 the side of the capitalist and employer by giving him a 
 share in the increased business efficiency due to his co- 
 operation. A new source of i3rofits would thus be opened 
 up which, being created by the laborers, should be shared 
 by them. Such profits would arise from a reduction in the 
 waste of materials, improved quality of the work, less ex- 
 pense in supervision, the avoidance of la])or troubles, great- 
 er permanence of service, and suggestions from the em- 
 ployes in regard to improvements likely to reduce the cost 
 and improve the products. Notwithstanding its theoretical 
 advantages, it will be noticed that it is obviously impossi- 
 ble to segregate the profits caused by the introduction of 
 profit sharing from those earned by the efficiency of the 
 general management. Moreover, workmen usually have 
 no method of determining what the real profits of an en- 
 terprise in any one year have been. They are therefore 
 likely to assume that the system is being used to defraud 
 them by inducing them to work harder without corre- 
 spondingly increasing their wages. Furthermore, almost 
 every enterprise occasionally experiences an iniprofitable 
 year, and this unfortmiate condition is more likely to re- 
 
212 MAURICE H. ROBINSON 
 
 suit from inefficiency in the management than from inef- 
 ficiency on the part of labor. Hence, whenever bad years 
 do come the profit sharing plan is likely to be broken np. 
 And finally, the introduction of the piece rate system and 
 the bonus and premium plans have given workmen in many 
 industries an opportunity to profit more directly from their 
 own increased efficiency than any system of profit sharing 
 is able to provide. In some cases the profit sharing plan 
 has been conducted on the Santa Claus system, the employ- 
 er making his employes a present at the end of each year, 
 the amount of such distribution being entirely dependent 
 upon his own individual wishes in the matter. This plan 
 of conducting the profit sharing method is, of course, ob- 
 jected to by selfrespecting workmen on the ground that it 
 is paternalistic in its nature and that it is likely to be used 
 for the purpose of depressing the general scale of wages. 
 
 The profit sharing principle was adopted by Mr. Smith 
 in connection with the new Trades Combination Movement 
 as the most feasible plan for securing the co-operation of 
 the labor unions and the consolidations of which he was 
 the originator. Briefly the Smith's alliance plan is as fol- 
 lows : A combination of all of the employers in a given in- 
 dustry is formed, similar to the German kartels. Then 
 the local unions formed in each one of the various plants 
 are joined in a central organization which unites all the 
 labor unions within the industry into a federal union. A 
 combination is then effected between the federation of la- 
 bor unions and the combination of employers. The work- 
 men are guaranteed standard wages in addition to a share 
 in the profits which result from the combination of both 
 employers and laborers, the percentage of such profits be- 
 ing determined by the labor cost of the articles which are 
 produced by the several manufacturing companies. In 
 this case the profit sharing plan is certain not only to give 
 the workman a portion of the profits resulting from a mo- 
 nopolistic combination, but at the same time tends to per- 
 
MODERN BUSINESS ORGANIZATION 213 
 
 petuatc such iii()iio})oly hy keeping the workmen interested 
 in its i'ntiiro development. 
 
 Participation in Ownership. Under the corporation 
 system of conducting business enterprises any employe 
 who is able and willing to save a portion of his wages can 
 usually i)urehase stock in the company by which he is em- 
 ployed and thus share in the profits of the enterprise. This 
 method, however, gives him profits as a capitalist rather 
 than as a workman. Hence, whenever a company desires 
 to stimulate efficiency on the pai-t of its employes, some 
 other method of bestowing an interest in the business up- 
 on those considered especially worthy must be devised. In 
 the individual proprietorship and the partnership this 
 method has been practiced from the earliest times with de- 
 cided success. The individual proprietor sooner or later 
 finds some especially trustworthy employe whom he oft'ei^ 
 a share in the business. The partnership then formed ex- 
 pands by adding others to the favored circle. This method 
 was used by Andrew Carnegie in the earlier days of the 
 steel industry to promote efficiency among his superintend- 
 ents and managers, and a considerable number of the 
 leaders in that field owe their opportunities largely to the 
 use of this principle. AMien the Carnegie company was 
 converted from a partnership to a corporation it was stated 
 that the partnership foi-m had been retained longer than 
 would otherwise have been the case in order to make use 
 of this system. It was further stated that after the forma- 
 tion of the corporation means had been found for continu- 
 ing the same general method of rewarding the most effi- 
 cient officials of the company. 
 
 It is, of course, plain that under tlie corporation form 
 of organization for an operating business the process of 
 awarding stock to employes for faithful and efficient serv- 
 ice is subject to certain difficulties which do not occur with 
 the individual proprietor and the partnership. As stated 
 in a previous section, the laws of the various states require 
 
214 MAURICE H. ROBINSON 
 
 that stock shall be issued only for an equivalent in cash, 
 property or service. When stock is transferred to em- 
 ployes it must be for services, and if the employe is to re- 
 ceive any benefit over what might have been obtained by 
 receiving his wages in cash, he must be overpaid for his 
 services or, what is the same thing, he must be awarded 
 his stock at less than the actual value. This makes it ex- 
 ceedingly difficult to arrange any plan satisfactory to the 
 company and to the employes which is not at the same 
 time contrary to public law. The plan adopted by the 
 Steel Corporation is perhaps the best known of all such 
 projects. The plan in brief is as follows: 
 
 *' Every workman employed by the Steel Corporation 
 can buy a limited number of shares of the 'corporation's 
 stock at a price that is now approximately the market 
 price — the least well paid employes having the precedence 
 both in the receiving of stock and in the proportionate 
 number of shares they can buy. They can pay for the 
 stock out of their salaries at any time within three years, 
 in the meantime receiving a seven per cent dividend on 
 the total amount to be invested and paying five per cent 
 interest on the deferred payments. If the employe dis- 
 continue his payments before the stock becomes his, he 
 can get back the money he has paid in and he may keep 
 the difference between the dividend on the whole and the 
 interest on the unpaid part. If he keeps the stock after 
 he has paid for it, and remains an employe of the company 
 for five years, he receives another payment as an additional 
 dividend of five dollars a year for each share. If during 
 the five years he leaves the company this additional bonus 
 is paid into a fund which is divided among the employe 
 stockholders who have remained with the company. A 
 man who is seriously disabled, or the estate of a man who 
 dies while in the service, receives the bonus for the years 
 during which he worked." 
 
 This plan it will be observed is at the best only a partial 
 
MODERN BUSINESS ORGANIZATION 215 
 
 substitute for the method so successfully used by Carnegie 
 up to the time of the union of the Taniec^ie Company with 
 its leading competitors, in 1901. It is undoubtedly attrac- 
 tive to the higher salaried officials, but it cannot in any 
 way be considered as a substitute for the premium plan 
 of stinmlating efficiency among the rank and file of the 
 workmen. The Steel Corporation apparently realized this 
 defect and as early as 1905 established a bonus fund for 
 the purpose of rewarding meritorious workmen by the dis- 
 tribution of cash or stock quite independent of the sale of 
 prefeiTed stock. In addition to the cash bonuses, the com- 
 pany has regularly awarded a small amount of common 
 stock, $21,000 during one year, as a special reward for ef- 
 ficient service. 
 
 Pension Systems. While it is obviously impossible in a 
 work on business organization to describe at length the de- 
 tails of the various systems by which pensions for tem- 
 porary or permanent disability are aw^arded, it is proper 
 to call attention to this method of stimulating efficiency. 
 Whether the pension fund is contributed jointly by the 
 company and the employes, as in the case of the Pennsyl- 
 vania Railroad Company, or by the corporation alone, the 
 pension system is from the point of view here presented a 
 reward for continuous efficiency through a period of years. 
 In this respect it is to be contrasted with the bonus and 
 premium systems, both of which are rewards for temporary 
 efficiency rather than for permanent and continuous serv- 
 ice. The two plans thus supplement each other and neith- 
 er may be neglected by an enterprise that hopes to main- 
 tain a high standard of efficiency among its employes. 
 
 The Problem of Prices. 
 
 A business enterprise manufactures or purchases goods 
 to sell again at the highest price consistent with pennanent 
 success. From the price obtained must be paid the interest 
 on the investment, the cost of material, and the wages of 
 
216 MAURICE H. ROBINSON 
 
 labor. If the gross amount received from sales exceeds the 
 smn of these various items, the business shows real profits; 
 if less, it shows a real loss. Efficient management, then, in 
 addition to the work already discussed, nameh^ wise in- 
 vestment and efficient operation, has a third problem to 
 solve — the problem of fixing prices. 
 
 It is evident that the price may be made under two very 
 different conditions: First, in competition with rival es- 
 tablishments, and second, without such competition. 
 
 1. When goods are sold in direct competition ^^ith 
 other business establishments a maximum price is fixed 
 quite independent of the management. It is of course pos- 
 sible to cut iDrices established by competitive conditions 
 and whenever this is done, the extent of the cut is entirely 
 within the control of the management. An efficient man- 
 agement will not, however, in any case cut the price be- 
 low the cost of iDroduction except as a temporary expedient. 
 It is, therefore, desirable for every business enterprise to 
 know the cost of production for each and every class of 
 goods manufactured or sold. This can be determined, pro- 
 ^aded the business has been organized in a systematic way 
 as described in a previous section and an efficient ac- 
 counting department is maintained. Most manufacturers 
 while able to state whether they have made a profit from 
 the business as a whole in any year, are in most cases not 
 in a position to say just what it costs to manufacture and 
 seU any one of the various articles which they produce. 
 Consequently when they find a competitor cutting prices 
 for the purpose of enlarging his sales, a disastrous price 
 war is precipitated. If each of the rival manufacturers 
 knew the exact cost of producing the goods, he would hesi- 
 tate long before offering one dollar's worth of a manufac- 
 tured product for seventy-five cents in money. Thus sta- 
 bility of prices would be maintained, industrial develop- 
 ment would proceed at an even pace, and one of the funda- 
 mental causes of our periodical panics would be eliminated. 
 
MODERN BUSINESS ORGANIZATION 217 
 
 The cutting of prices to work off unseasonable or out- 
 of-date cfoods is of course quite a different matter. Here, 
 for sonic reason, the manufactured prodnct has lost a part 
 of its noi-nial vahie and nnist l)e disposed of at the best 
 possi])le price to avoid further or greater loss. Such con- 
 tingencies, however, are usually caused by low efficiency 
 on the part of those who conduct the character and 
 quantity of the output, and the management should 
 take warning and see that this serious business error is 
 not repeated. 
 
 When the regular competitive price is fixed outside of 
 and independent of the control of the management, the 
 problem of the sales department consists in finding the 
 market and disposing of the goods in the most economical 
 manner. Since the price cannot be put above the competi- 
 tive level of prices, but may be maintained there by efficient 
 salesmanship, every penny saved in the cost of marketing 
 accrues to the company. To maintain the price at the 
 present level, however, the manufacturer of a particular 
 class of goods may not increase the output beyond the 
 natural growth of population and the increase of purchas- 
 ing power that comes from increased wealth. 
 
 The price policy in a competitive industry is thus in- 
 extricably involved in the problem of production. On this 
 account the Fall River cotton mills shut down by concert- 
 ed action whenever the stock increases at too rapid a rate. 
 Their only alteraative would be a reduction in price, a 
 lower rate of profits and, if this process w^ere continued, 
 bankruptcy for all of the inefficient mills. 
 
 2. AMien a company controls the production of an ex- 
 clusive product for which there is no effective substitute, 
 the price policy becomes of equal importance to that of 
 investment or operation. In this case the managers may 
 fix the price, and limit the production to the amount the 
 market will take; or they limit the output and let the price 
 take care of itself. The result is the same in either case. 
 
218 
 
 MAURICE H. ROBINSON 
 
 It is of course proper to say that a monopolistic producer 
 may fix any price he pleases. This is quite true, but it is 
 equally true to say that the purchaser of monopolistic 
 goods may buy any quantity that he thinks best. The 
 higher the monopolist fixes the price, the less he can sell. 
 The first problem, then, is to find that price at which the 
 profits of the enterprise are the largest possible. The condi- 
 tions under which a monopolist fixes his price are best il- 
 lustrated by a table showing prices 'per unit, the number 
 of sales, and the earnings and expenses connected with 
 the same. The following table shows these various items 
 and under these conditions it is evident that if the mo- 
 nopolist makes his price six cents per unit it gives him the 
 best possible results. 
 
 Price 
 
 Number 
 
 Total 
 
 Variable 
 
 Total 
 
 Fixed 
 
 Total 
 
 Net 
 
 per 
 
 
 
 Expenses 
 
 Variable 
 
 Expen- 
 
 Expen- 
 
 Revenue 
 
 unit 
 
 Sales 
 
 Earnings 
 
 per unit 
 
 Expen- 
 ses 
 
 ses 
 
 ses 
 
 
 $0.10 
 
 600,000 
 
 $ 60,000 
 
 $0.03 
 
 $ 18,000 
 
 $50,000 
 
 $ 68,000 
 
 — $ 8,000 
 
 .09 
 
 800,000 
 
 72,000 
 
 .03 
 
 24,000 
 
 50,000 
 
 74,000 
 
 — 2,000 
 
 .08 
 
 1,200,000 
 
 96,000 
 
 .03 
 
 36,000 
 
 50,000 
 
 86,000 
 
 ■f 10,000 
 
 .07 
 
 1,800,000 
 
 126,000 
 
 .03 
 
 54,000 
 
 50,000 
 
 104,000 
 
 f 22,000 
 
 .06 
 
 2,500,000 
 
 150,000 
 
 .03 
 
 75,000 
 
 50,000 
 
 125,000 
 
 -1- 25,000 
 
 .05 
 
 3,500,000 
 
 175,000 
 
 .03 
 
 105,000 
 
 50,000 
 
 155,000 
 
 -f 20,000 
 
 .04 
 
 .5,500,000 
 
 220,000 
 
 .03 
 
 165,000 
 
 50,000 
 
 215,000 
 
 -f 5,000 
 
 Having found the proper price the monopolist may 
 maintain it only so long as he restricts his output. His 
 profits then must be invested in other lines. If he can dis- 
 cover other fields where he can establish other monopolies, 
 well and good. If not, he faces the following conditions: 
 Either he must invest in a competitive industry Avhere 
 profits are already low, or reinvest in his own monopolis- 
 tic industry causing the price and profits to fall, or spend 
 his surplus gains in extravagant living. 
 
 When a monopolistic producer distributes his own 
 goods to the final consumer, he is ordinarily able to main- 
 tain the price in certain localities and to certain individuals 
 somewhat above the price he receives in other localities 
 
MODERN BUSINESS ORGANIZATION 219 
 
 and from other individuals. In such cases the fixing of 
 the price is even more com])licated since special conditions 
 nuist be considered in each case. If <]^oods grow stale on 
 his hands, or out of date, the monopolist "will be forced to 
 sell his product at less than the cost of production, the same 
 as any other producer. 
 
 The Problem of Management. 
 
 The problem of the management is, then, to secure and 
 maintain the highest possible degree of business efficiency, 
 a task which comprises the following separate and distinct 
 functions : 
 
 1. Finding the opportunity to produce materials, man- 
 ufacture goods and perfoim services which society es- 
 pecially needs. 
 
 2. Determining the location, character, arrangement 
 and equiiDment of the business establishment. 
 
 3. Finding the necessary capital for the construction 
 and maintenance of the plants. 
 
 4. Operating such establishments at the least possi))le 
 cost. 
 
 5. Selling the products at the highest price consistent 
 with the permanent development of the enterprise. 
 
 Each of these functions demands a somewhat different 
 kind of training and exjoerience and hence a group of 
 specialists has been developed in each field to whom the 
 work is ordinarily entrusted and the general management 
 then organizes the business into its natural departments 
 and co-ordinates and directs the operation of all from the 
 viewpoint of the business enterprise as a whole. The man- 
 agement then must not only be in direct communication 
 with all the departments, but in addition must have ac- 
 curate and periodic tests of the efficiency with which each 
 is being conducted. In the smaller business enterprises 
 the proprietor not only acts as manager for the whole busi- 
 ness, but often as promoter, engineer, financier, superin- 
 
220 MAURICE H. ROBINSON 
 
 tendent, salesman, and finally tests tlie efficiency of the 
 various operations through the practical, if not entirely 
 scientific, method of drawing the surplus profits. 
 
 In the larger enterprises, whether owned by one or 
 many, the operations become too complex and extensive 
 to be tested by the simpler methods of the smaller estab- 
 lishments. For this purpose a complete and comprehen- 
 sive accounting department must be maintained. As al- 
 ready observed in the section describing the organization 
 and working of an accounting department, this science 
 has a double task to perform: 
 
 1. To show the economic relationships of the various 
 persons having credit relations with the business. These 
 purchasers are charged with the goods bought on account 
 and credited with payments. The laborers are credited 
 with their services, and charged when paid their weekly 
 or monthly wages. Subscribers to the capital stock are 
 charged for their subscriptions and credited with pay- 
 ments which they make on that account. The sharehold- 
 ers are credited with their proper proportion when divi- 
 dends are declared and charged when such dividends are 
 paid. In this way a complete record is kept of all credit 
 transactions which protects the rights of both parties in 
 the transactions. Where books are kept simply for this 
 purpose, no account need be taken of cash transactions, 
 although whenever any one except the proprietor handles 
 money a cash book is kept for the purpose of detecting 
 theft and carelessness. Where all the transactions are in 
 cash, bookkeeping of this character may be entirely dis- 
 pensed with. 
 
 2. To test the efficiency of the business as a whole, and 
 where there are several departments, as is usually the case, 
 the efficiency of each department. With the development 
 of large business enterprises usually carrying on many 
 kinds of work, the second function of the accounting de- 
 
MODERN BUSINESS ORGANIZATION 221 
 
 paHment is of equal if uot greater importauce tliau the 
 
 tirst. 
 
 The Tests of Efficiency. 
 
 The simplest method of testing efficiency in a business 
 estahlishnunit is to draw up a balance sheet at the beginning 
 of the period and another at its end, and by a comparison 
 of the two statements the efficiency of the business will be 
 shown. To illustrate this method we shall assume that the 
 Illinois Automo])ile Corporation has been in operation for 
 one year and that a balance sheet properly drawn up shows 
 the following conditions: 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Balance Sheet at the End of the Fl^^t Year. 
 
 Assets. Liabilities. 
 
 $ 250,000 Capital stock 
 
 ....$ 750.000 Accounts and bills pay 
 
 Less 5% 37,500 712,500 Accrued wages 50,000 
 
 Land $ 250,000 Capital stock $5,000,000 
 
 Buildings $ 750.000 Accounts and bills payable, 500,000 
 
 Equipment $1,000,000 Earnings for the year 1,112,500 
 
 Less I07o 100.000 900,000 
 
 Materials 2,200,000 
 
 Accounts and bills receiv- 
 able 600,000 
 
 Cash 2,000,000 
 
 $6,662,500 $6.f)62..')no 
 
 At the l)eginning of the year $5,000,000 was raised by 
 subscrij^ttion and the capital stock was invested in a model 
 plant. The necessary equipment and sufficient materials 
 to conduct the business of manufacturing automobiles effi- 
 ciently were purchased, and the remainder of the subscrip- 
 tions was kept in the treasury in the form of cash. At the 
 end of the year it is found that allowing the usual depre- 
 ciation on plant and machinery, the assets have increased 
 to $6,G62,500, while the liabilities amount to $5,550,000. 
 The difference between these sums, $1,112,500, is the earn- 
 ings for the year resulting from the manufaetui-e and sale 
 of automobiles. As $5,000,000 was invested, the earning^i 
 
222 MAURICE H. ROBINSON 
 
 give a return for the year of 22.6 per cent upon the invest- 
 ment. 
 
 A more elaborate method of testing the efficiency of a 
 business enterprise consists in keeping an account of all 
 materials used, all wages paid, interest on the investment 
 and the gross amount received from sales. If the efficiency 
 of a business as a v/hole only is to be tested, the foregoing 
 will be sufficient and the items properly arranged will form 
 an income account for the year. This is shown in the fol- 
 lowing income account : 
 
 ILLINOIS AUTOMOBILE CORPORATION. 
 
 Income Account for the First Year. 
 
 Net cost of materials $4,000,000 Sales, 4,000 cars @ $2,000 
 
 Interest on investment ... 250,000 each $8,000,000 
 
 Depreciation 137,500 
 
 Wages 2,500,000 
 
 Earnings 1,112,500 
 
 $8,000,000 $8,000,000 
 
 In this statement no attempt is made to classify the 
 expenses except in a most general way since the sole ob- 
 ject in view is to test the efficiency of the corporation as a 
 working whole. Here it is shown that the net receipts 
 from the sales exceeds the gross cost of producing the auto- 
 mobiles by $1,112,500, and consequently the net earnings 
 for the year are thus determined. It will be further no- 
 ticed that if all the costs were consolidated into one sum, 
 namely, $6,887,500, the efficiency of the management would 
 be shown equally well. By subdividing the expenses into 
 their several natural divisions, the proportion of the total 
 costs resulting from the operation of the several depart- 
 ments in the enterprise may be calculated, and by compar- 
 ing these sums the relative efficiency of each department 
 may be determined. In reaching conclusions two methods 
 may be followed: First, comparing the several classes of 
 costs from year to year in the same plant, and second, com- 
 paring the several classes of costs in different plants in 
 
MODERN BUSINESS ORGANIZATIOiS 223 
 
 the same year. In all cases, however, the expenses con- 
 nected with each of the several departments must ))e segre- 
 gated and charged against the appropriate department. 
 In this case both a balance sheet and an income account is 
 necessary — the balance sheet to show the extent to which 
 the fixed capital assists in each of the separate classes of 
 operations, and the income account to show the contribu- 
 tions of the managerial and labor elements in producing 
 corresponding classes of goods. 
 
 How Accounting Assists the Management. 
 
 To discover the cause of efficiency and inefficiency in busi- 
 ness management a complete record of all transactions must 
 be kept and arranged periodically in accordance with well- 
 known principles of modem cost accounting. The corpora- 
 tion which we have been using for illustrative purposes 
 makes the problem as simple as possible. Only one article is 
 being manufactured and only one type of this article. We 
 can thus readily find the cost per car by dividing the total 
 cost by the number of cars produced, giving in this case 
 $1,721,875 as the cost of each car. If our competitors should 
 reduce the price of cars of equal value below that simi, we 
 must either reduce our cost of manufacture or go out of 
 business. We have, however, as yet no means of deter- 
 mining the relative efficiency of the several departments 
 of our business. To do this we must find the cost of ad- 
 ministration per unit of product, the cost of materials, the 
 cost of power and the cost of labor, etc., etc. By using the 
 investment of the company in each of these departments 
 as a basis, and charging to it its proportion of insurance, 
 repairs, heat, light, power, interest, depreciation and 
 wages, we can detei-mine the extent to which each of these 
 factors enters into the final cost of the manufactured prod- 
 uct. These costs can then be compared from week to 
 week and from year to year with the results of operations 
 in the output of cars, and any change in the relative effi- 
 
224 MAURICE H. ROBINSON 
 
 ciency of each department may thus be detected at once. 
 Where several departments of the same character are op- 
 erated, the company is in a position to compare the relative 
 efficiency of such departments. As a result of these com- 
 parisons the department that is lagging may be investi- 
 gated and the cause foimd and remedied wherever possible. 
 On the other hand, departments that are improving in effi- 
 ciency will be known and may be properly rewarded. 
 
 An accounting system in a well-managed business en- 
 terprise, then, is maintained not only to show the debit and 
 credit relations of the various parties interested, but, first, 
 to deteiTQine the efficiency of the business as a whole; sec- 
 ond, to determine the relative efficiency of the various de- 
 partments at different times and under different circiun- 
 stances, when compared with each other and with other de- 
 partments similarly situated; and third, to assist the man- 
 agement not only in detecting the causes of inefficiency and 
 applying the proper remedies, but also of efficiency and be- 
 stowing the proper rewards upon those who are responsible 
 for securing such results. 
 
RAILROAD ORGANIZATION. 
 
 BY GEORGE T. SAMPSON. 
 
 [Division Engineer, New York, New Haven and Hartford Railroad.] 
 
 Railroad organization is a subject on whicli new chap- 
 ters may be written and required to describe the condi- 
 tions of each new year, and I may say month, of the present 
 times. The recent years have marked an epoch in rail- 
 road history when consolidation has been the rule in our 
 country, when no scheme for uniting different companies 
 seems too great to be considered and none too great to 
 be consummated. It appears to me as one of the notice- 
 able results of the greater organizations, while in part 
 it may perhaps be considered as a natural and proper 
 growth and improvement in railroad methods, that while 
 the duties of the great majority of men employed in rail- 
 road service continue on the same general lines, with re- 
 sponsibilities much the same as in years past, there is re- 
 quired of nearly all a better education and the performance 
 of a greater amoimt of clerical work than was ever ex- 
 pected in the earlier years. 
 
 The larger organization requires an additional num- 
 ber of active workers in official and clerical positions not 
 previously considered as necessary, all working in har- 
 mony, subject to but one highest in authority instead of 
 working on many independent lines. It is because the 
 one guiding mind at the head must in some way and man- 
 ner be informed of results attained and work perfonned 
 by the lowest subordinate that this additional clerical work 
 is required of all, and it is for the collection, compilation 
 and tabulating of the great mass of facts and figures which 
 
 B.II-IS ^^* 
 
226 GEORGE T. SAMPSON 
 
 come from the subordinates into proper shape for the in- 
 telligent consideration of the one at the head that the 
 greater corporation needs to employ more clerical assist- 
 ance and to establish departments with able men in 
 charge in the intermediate positions which were not 
 thought of in the earlier years. It is in these new depart- 
 ments, these intermediate positions, that the greater or- 
 ganizations of today become evident and distinctly dif- 
 ferent from our small organizations of twenty-five or 
 thirty years ago. 
 
 Let me here call your attention to plate No. 1, a chart 
 or graphical representation of the various departments 
 required for the operation of one of our larger corporations 
 of today, an organization operating about 2,000 miles of 
 located railroad, with total tracks of about 4,000 miles, 
 employing now about 30,000 persons, with annual earnings 
 of about $40,000,000. Notice that this chart shows the 
 numbers employed in each of the departments; that out 
 of a total of 30,000, those employed in the transportation 
 department, the freight department, and passenger depart- 
 ment combined, who may be said to be the workers who earn 
 the income, number 29,347 persons, or 98 per cent of the 
 whole. Another per cent, or 304 persons, conduct the 
 accounting department and keep the books, and the re- 
 maining departments, whose numbers combined amount to 
 294 persons, or the remaining one per cent, are entrusted 
 with work which requires the direct disbursement of funds 
 or the oversight of expenditures. 
 
 Also note plate No. 2, showing an organization operat- 
 ing about 2,250 miles of located railroad, with total tracks 
 of about 4,000 miles, employing now about 24,000 persons, 
 with annual earnings of about $30,000,000. On chart No. 
 1, I have attempted to show the relation existing between 
 the highest and those officials at the lower end of the list, 
 which may be spoken of as subdivisions of departments, 
 in which a considerable number may be employed and 
 
RAILROAD ORGANIZATION 
 
 227 
 
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 GEORGE T. SAMPSON 
 
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RAILROAD ORGANIZATION 229 
 
 where the ollicial at the head of the same, witli well- 
 delliied title and duties, is charged with tlie execution of 
 woi'k controlling the receipt or disbursements of funds or 
 material for which he may be required to render an ac- 
 count and held responsible for the accuracy of the same. 
 It shows how these lowest officers are related and con- 
 nected to the highest through the intermediate officers. 
 
 In a paper of this kind it is unnecessary to attempt 
 to detail the duties of the higher officers. The name of 
 the department under their direction suggests in a general 
 way the nature of their work. The chart shows how the 
 several departments are related. When w^e consider the 
 2,000 miles and the extent of the territory traversed, the 
 volume of new work that must arise, the relations to be 
 cultivated and maintained with the public and outside 
 interests pertaining to this work, the number of subordi- 
 nates whose efforts are to be supervised and directed, we 
 realize that their time and attention must be occupied up 
 to the full limits. 
 
 In the constniction department, which is charged with 
 the duty of building, and to a considerable extent main- 
 taining, the right of way, yards, roadbed, tracks, bridges, 
 buildings, water stations, etc., we see it as the duty of the 
 officer at the head of it to determine upon and direct the 
 preparation of standard drawings and specifications for all 
 materials and mechanical parts which may enter into the 
 same, so far as they can be made to serve the purpose, to 
 infoiTU all the departments interested and his subordinates 
 of these standards; and having decided upon work to be 
 undertaken and having assigned the same among his sub- 
 ordinates, meaning particidarly the district engineer and 
 the di\nsion engineers under him, we come to an officer in 
 the division engineer who may be said to have work that 
 is to a great extent a regular routine. With certain mile- 
 age, or part of the system, assigned to his care, it is his 
 duty, with the assistance of the force under him, to keej) 
 
230 GEOEGE T. SAMPSON 
 
 tlioroughly informed of all the characteristics of his divi- 
 sion—its grades and alignments; its mileage and stations; 
 its right of way, fences and land lines; its record of loca- 
 tion and title deeds of land o^\aled; its highway and private 
 crossings; its yards and tracks, with the various patterns 
 of rails, frogs and switches used in the same; to a con- 
 siderable extent its interlocking systems, signals and build- 
 ings; its bridges, with the age, length, strength, kind, con- 
 dition and pattern of each; its w^ater stations, with the 
 locations and sizes of tanks, pipe lines and water cranes, 
 together with the sources of supply and their capacity. 
 He is expected to have information on all these subjects 
 ready for use at all times on short notice; to keep plans 
 and records perfected and correctly up to date. 
 
 In ascertaining and maintaining the maximum clear- 
 ance section of his line he has a work of no small impor- 
 tance, requiring a critical and painstaking accuracy in in- 
 spection and measurements, these to be corrected for rail 
 elevations and curve ordinates; and in making answers to 
 frequent inquiries about the possible movement of rolling 
 stock of unusual size from foreign lines arriving at junction 
 stations. 
 
 Added to the work above named, which is largely a 
 matter of maintenance, comes that which is necessary in 
 planning and estimating for additions or changes in ar- 
 ranging for new construction, the specifications, state- 
 ments of quantities and schedules of materials. When, for 
 work to be performed by company employes, the material 
 needed is to be purchased through the purchasing agent 
 and supply department, requisitions must be written on 
 proper blank forms, so specifying each item in descriptive 
 wording kno^\m to the trade that the correct and proper 
 article wdll be surely procured and delivered by the party 
 who may receive from the purchasing agent the order to 
 supply the goods. 
 
RAILROAD ORGANIZATION 231 
 
 In the matter of accounts approved bills for labor or 
 materials (for freight charges or ti'ain expense) must be 
 forwarded to officers next above in rank, with notations 
 on the same clearly stating their distribution under head- 
 ings or titles of accounts furnished by the accounting 
 department. 
 
 From the chart we note the department of law, real 
 estate and taxes, and the corps of officials needed for its 
 work. As the corporation is a creation of the law, so must 
 its administration be conducted according to law, and the 
 necessity is apparent for the employment of those thor- 
 oughly versed in its tenets. All other departments need 
 advice and information about the law's requirements and 
 restrictions. All kinds of legal talent are represented in 
 the department, as counselors or advocates in civil or 
 criminal proceedings, or as conveyancers and real estate 
 la^^yers. 
 
 The cor|:)oration pays both its state taxes and, in the 
 case of corporations doing interstate business, its fed- 
 eral corporation taxes, as well as the local taxes as- 
 sessed on property in to-^^Tis and cities. By force of cir- 
 cumstances largely, rather than from choice, the company 
 is possessed of land and buildings to be cared for and made 
 remunerative; property outside of that which is absolutely 
 necessary for the operation and maintenance of the rail- 
 road, and to properly execute its undertakings new pur- 
 chases are frequent. Tlie real estate and rent agents prove 
 quite as necessary for the company as for any large indi- 
 vidual property owner, and they fill an important place 
 in the organization. 
 
 The railroad corporation is a target for all kinds of 
 claimants. Its weak and vulnerable points of attack are 
 always exposed to view. Tlie claims presented are of all 
 kinds, honest and dishonest, just and unjust, of both large 
 and small amounts, arising from all imaginable and possible 
 causes. Prominent among them are personal injur}' cases, 
 
232 GEORGE T. SAMPSON 
 
 the lost or damaged freight or baggage cases and fire 
 damages. 
 
 It requires a force of trained attorneys and agents to 
 consider and weigh the evidence in these cases, to sift the 
 false from the true, to decide which shall be settled out 
 of court, which shall stand the chances of trial, and to pre- 
 pare a case for trial, as well as to conduct it. 
 
 The passenger department, in common with the freight 
 department, is distinctly one of the money earners, its im- 
 portant expenditures being practically only those necessary 
 to support its employes in its daily routine, to advertise 
 its line in an enterprising, attractive and progressive man- 
 ner and to pay its bills for printing. While charged with 
 the duty of maintaining an active and constant lookout 
 for new passenger business, of devising ways and means 
 to secure and accommodate it when obtained, it is also 
 its chief duty to fix the rate or price for passenger travel, 
 to maintain its rates and sell its service at a lawful and 
 reasonable price; and originate and continue in its proper 
 channels the daily system of collection of income, so es- 
 sential for the life of the corporation and without which 
 it cannot long endure. 
 
 Reference to the chart of our sample system shows at 
 the head of the passenger department a passenger traffic 
 manager, and he assisted by one or more general pas- 
 senger agents, their number depending much on local 
 peculiarities of the line or its traffic; a general ticket 
 agent, a general baggage agent and an express agent. The 
 title of each carries with it a pretty good suggestion and 
 definition of the duties of each. 
 
 Without attempting to be too comprehensive in the 
 description of the duties of these officers, suppose we take 
 up as a single subject the consideration of tickets, their 
 issue, sale and collection. Think if you will of the hun- 
 dreds of passenger stations on a modem system. Con- 
 sider for a moment the multitude of combinations possible 
 
RAILROAD ORGANIZATION 233 
 
 and the large liguros resiiltiug if it should l;e found neces- 
 sary to furnish a consideralde number of tickets for travel 
 from any one station to all others of the system, to say 
 nothing of through tickets to stations on connecting lines. 
 Suppose one single new station should be added to the 
 system, would it not be quite an undertaking and expense 
 to simply get in order and furnish proof for the printer, 
 not onl}" in the preparation of the tickets themselves, 
 but in the revision of the tariff sheets of rates, in the re- 
 vision of mileage tables, in the preparation of time tables 
 and folders and so forth ? 
 
 Tlie tickets, having been printed and made ready by 
 the general ticket agent, are by him sent to the station 
 agents for sale, a carefully prepared record having been 
 made of the numbers delivered to each agent and that 
 record also forwarded to the auditor of passenger receipts. 
 
 The station agent, on making sales of tickets, sends 
 daily cash remittances to the treasurer, and monthly re- 
 ports of all tickets sold and prices for same, and tickets 
 remaining unsold, to the auditor of passenger receipts, tak- 
 ing credit for cash paid out for cash rebate checks re- 
 deemed. The passenger conductor on his train, ha^Hing 
 been previously notified of the lawful issue of tickets, 
 recognizes all such when offered by the passenger, collects 
 a cash fare when no ticket is forthcoming, issues to the 
 passenger a special cash rebate check (in such case re- 
 taining for himself a duplicate of the same) and daily re- 
 mits to the treasurer all moneys so received; and forwards 
 to the auditor of jiassenger receipts all tickets collected 
 and duplicates of cash rebate checks issued, with reports 
 covering the same on proper blank forms. 
 
 Following the routine outlined above, the income and 
 earnings of the passenger department are traced to the 
 treasury depai-tment, and the record and account of sales 
 are so finally deposited with the accounting department. 
 
234 GEORGE T. SAMPSON 
 
 The advertising part of the passenger department con- 
 stitutes no small part of the work in each general pas- 
 senger agent's office, and while large sums are annually 
 spent in such work, still, like all business which has a 
 healthy growth, there is no doubt of the need for the ex- 
 penditure. The public wishes to know and needs to know 
 all of the scenic and historic attractions on the line, and 
 numerous pamphlets and books are issued descriptive 
 of summer resorts and places of interest. The pub- 
 lic needs to have traveling made easy; needs to have al- 
 ways before them and handy for ready reference leaflets 
 and pocket time tables showing the time for arrival and 
 departure of trains. The issue of these pocket time tables, 
 kept up to date and correct for all changes of trains, for one 
 of our modern corporations annually reaches a number of 
 million copies. So much I may say and more for the pas- 
 senger department without more than mention of special 
 business which covers the question of arranging prices and 
 accommodations for special excursions, private cars, the- 
 atrical troupes, and so forth, which are oftentimes moved 
 over the road on a special time schedule arranged with 
 the transportation department. 
 
 The freight department, one of the money earners, 
 starting originally with the simple proposition to arrange 
 for hauling freight short distances between local points 
 on a single system, has grown to an organization equipped 
 for a volume of business enormous in its proportions and 
 far-reaching in its relations. Under contracts and rela- 
 tions now existing between connecting railroads, it is pos- 
 sible to ship property on a single through bill of lading 
 across the continent, from ocean to ocean, and I may per- 
 haps add across the ocean also. 
 
 Special freight agents and traveling freight agents are 
 the solicitors for freight to be shipped to competitive points, 
 as well as for new business, paying proper attention to 
 freight claim matters. 
 
RAILROAD ORGANIZATION 235 
 
 Tlie making of l'rci;;lit rates is the duty of the freight 
 traffic manager, and of the general freight agent, under 
 supervision of tlie former. The division and percentage of 
 through rates is also arranged by these officers. "When 
 rates are decided npon, notices of the same in proper form 
 are sent to the accounting department and to all agents 
 at all stations. 
 
 The ordinary routine business of the freight department 
 is as follows: A person desirous of forwarding goods pre- 
 sents with the property to any railroad agent an original 
 and duplicate form of shipping receipt, on which the goods 
 are enumerated and described. These are, if found correct* 
 signed by the agent and the original given to the shipper 
 as a receipt and evidence of contract. The duplicate is 
 held by the agent as a forwarding order, and used by him 
 in checking the goods into the proper car, and from it the 
 way bill is written with charges at tariff rates. The agent 
 keeps a press tissue copy of all way bills issued. If made 
 out in season, way bills go forward by the train which 
 carries the goods in custody of the freight conductor. 
 
 All agents who write a way bill send a copy of the 
 same to the accounting department, where it is checked 
 as to rates and proportions. In cases of through ship- 
 ments to distant points over connecting lines, owing to 
 pressure of business and to a desire to make prompt de- 
 livery, cars are often forwarded before the way bill per- 
 centages are figured out and written in on the way bills. 
 In such cases the way bills are sent by United States mail 
 to the junction point at the first connection with a foreign 
 road via which the goods are routed, where the respective 
 agents take the way bills into account, the receiving agent 
 paying to the delivering agent the revenue camed up to 
 that junction station. A terminal road and station pays 
 all accrued charges, and is reimbursed by collection from 
 the consignee. Settlements with connecting roads at junc- 
 tion stations, or with consignees, may be made daily, week- 
 
236 GEORGE T. SAMPSON 
 
 ly, or monthly, as agreed upon. Freight charges are a lien 
 on the goods, and usually collections are made when goods 
 are delivered; but where regular customers are known to 
 be financially all right credit arrangements are not un- 
 common. 
 
 ^Tien a shipment reaches a terminal, it is the first duty 
 of the terminal agent to audit the way bill and detect errors 
 either in rates or extensions, as well as to check up the 
 quantity and condition of the goods. 
 
 Notwithstanding all systems and care used to detect 
 and avoid errors, they will creep in; and, with cases of 
 accident and injury to goods, it becomes necessary to em- 
 ploy a freight claim agent with a clerical force under him 
 larger than that which is employed to originate and direct 
 the regular work of the general freight agent's office. 
 Claim cases per year count up into the tens of thousands. 
 It is the duty of this office to meet the claimants, to collect 
 all the evidence bearing upon each case and to adjust the 
 same if possible. 
 
 In case of through billing, where loss or error occurs at 
 a distant point on a foreign road, it often occurs that the 
 local or terminal road settles with and pays the claimant 
 and collects from the foreign road at fault, being first con- 
 vinced that the foreign road acknowledges the error and 
 will pay. 
 
 This matter of claims is of such magnitude and impor- 
 tance as to cause the organization of the freight clain: 
 association, in which the freight claim agents of each rep- 
 resent the interests of their respective roads. Its objeci 
 is the prompt and equitable settlement of freight claims 
 with claimants and between carriers. It has become at 
 interstate association, including 206 railroads as its mem- 
 bers, representing 167,091 miles in the United States, Can- 
 ada, and Mexico and 5,000 miles of water lines, combining 
 90 per cent of all transportation lines in North America, 
 Each railroad designates its representative in this associa- 
 
RAILROAD ORGANIZATION 237 
 
 tion, which formulates and publislies rules Tor llio unifonn 
 guidance of each freight claim agent's oflicc. 
 
 Freight receipts are forwarded to the treasurer and 
 accounted for to the accounting department in much the 
 same way as has been previously explained for the pas- 
 senger department, and statements above made about dup- 
 licate wa}^ bills show how the accounting dei)artment can 
 check the accuracy of agents' reports and remittances. 
 
 In the transportation department the officer who may 
 be said to be most closely informed in detail of the move- 
 ment of trains is the division superintendent, acting imder 
 the supervision and orders from a general superintendent. 
 He is expected to keep the wheels turning in an orderly 
 manner over the mileage entrusted to his care, and to 
 promptly restore order in each case should disorder arise, 
 lie is entrusted with the duty of preparing time tables, of 
 seeing that trains are safely handled in accordance with 
 the same, subject to the standard rules and regulations, 
 and of enforcing the observance of the rules among the 
 employes. Every employe, while on duty connected with 
 trains, on any division of a road, is under the authority 
 and must conform to the orders of the superintendent of 
 that division. 
 
 As the division superintendent is entrusted with the 
 safe conduct of the trains, so there is afforded to him, as 
 a means to that end, full control not only of the trains 
 and men employed on them, but also of the right of way, 
 roadbed and its structures, and all employed in their main- 
 tenance. In the performance of his duties he is assisted 
 often by an assistant superintendent on lines where ])usi- 
 ness is heavy, and always by a train dispatcher, a road- 
 master and a bridge super\'isor. The conductors and other 
 trainmen and station agents look to the division super- 
 intendent for their instructions in the care of company 
 property, and all matters other than those of income and 
 accounts. 
 
238 GEORGE T. SAMPSON 
 
 The chief train dispatcher has direct charge, imder the 
 superintendent, of the movements of all trains. He keeps 
 posted about the volume of traffic, orders out the motive 
 power as needed and directs car movements accordingly. 
 The trick dispatcher works eight-hour tricks. With the 
 aid of the telegraph he keeps in mind where all trains are, 
 issues orders needed and makes the entries on the train 
 sheet showing their movements. Operators at way sta- 
 tions report trains to him, and receive and deliver orders 
 to trainmen. 
 
 The roadmaster reports to and receives instructions 
 from the sujDerintendent. He has charge of the mainte- 
 nance of the roadbed, culverts, masonry, tracks, sidings, 
 yards, depot grounds, road crossings, and fences, and is 
 responsible for the safe keeping of all material and supplies 
 used in such work. He has full control and authority over 
 section foremen, trackmen, crossing gatemen and flagmen, 
 laborers and construction trains while at work. It is his 
 duty to report to the superintendent the time of all em- 
 ployes under him on proper forms for entry on payrolls, 
 properly distributing their time to the various works in 
 progress for the information of the accounting department, 
 and in similar manner make report and distribution of ail 
 materials used. Materials, supplies, and tools are to be 
 carefully inspected when first received and checked by 
 the invoice, making prompt report in case of discrepancies. 
 
 The length of line which may be assigned to the care 
 of the roadmaster will vary considerably, according to local 
 conditions and peculiarities, but in a general offhand way 
 it may be talked of at about 150 miles or less. This mile- 
 age is divided into sections of about 3 to 6 miles each, and 
 each section given its number, with its limits clearly de- 
 fined. Each section has its section foreman, and a sufficient 
 number of men to properly perform the necessary work, 
 varying according to the time of year, a rate which aver- 
 ages about one man per mile for the system through the 
 
RAILROAD ORGANIZATION 239 
 
 spriiiGf months and early part of siimnior, when now ties 
 and rail oiiii^ht to be put into track; al)Out three quarters 
 man per mile, after the allotted number of ties have been 
 placed, through the late summer and fall, and about one- 
 half man per mile throup^h the greater part of the winter, 
 excepting when a special extra force may be hired for 
 cleaning snow and ice as occasion requires. 
 
 The section foreman, or one of his men detailed for the 
 purpose, is required to examine the full length of his sec- 
 tion every morning. He is also expected to patrol the 
 section, both by day and night, during heavy storms or 
 violent winds, and to especially watch all points where ob- 
 structions are liable. He also must keep informed of the 
 time tables and the rules for the movements of trains; must 
 keep well supplied with torpedoes, flags, lanterns, and all 
 stop signals, and be possessed of intelligence to properly 
 use the same. 
 
 The bridge supervisor reports to and receives instruc- 
 tions from the division superintendent. His work on the 
 maintenance and repairs of bridges brings him into close 
 relations with the engineering department, requiring fre- 
 quent conference as to the best methods to be employed 
 or plans to be adopted. He is required to make frequent 
 inspections and keep informed in detail of the condition 
 of all structures under his care. Large quantities of lumber 
 and other material are used under his direction. It is his 
 duty to inspect and check up material by the invoices, 
 to report discrepancies or mark his approval on the bills 
 if found correct as to quality and quantity. Eeports show- 
 ing distribution of expense for material and labor arc re- 
 quired also in his case. He is also required to be familiar 
 with and obedient to the mlos governing trains, trainmen, 
 and other classes of employes, so far as they relate to the 
 proper discharge of his duties. He needs to be a thorough 
 mechanic, ingenious, and quick to act in emergency; of 
 
240 GEORGE T. SAMPSON 
 
 sound judgment as to the strength of materials, industri- 
 ous, and energetic. 
 
 Conductors, in common with locomotive engineers, on 
 both passenger, freight, and work trains, are required to 
 handle their trains according to the time tables and the 
 orders issued by the superintendent. It is the duty of 
 the conductors to make record of and to report to the 
 superintendent the numbers and initials of cars as moved 
 in their trains, whether loaded or empty; and at stations 
 named in the time tables as registry stations to make entry 
 in books provided showing the time of arrival and departure 
 of trains, the numbers of locomotive and cars and the name 
 of engineer and conductoi-. Conductors must also report 
 car initials and numbers as moved in their trains, and state 
 whether loaded or empty, in the same manner as agents. 
 
 Station agents report to and receive orders from the 
 division superintendent, and also obey orders and instruc- 
 tions issued by the officers of other departments with which 
 they have business relations. They also make report to 
 the manager of the car service association. At a small 
 station the agent acts also as telegraph operator, while 
 the larger and important stations have a freight agent, a 
 ticket agent, and operators also. Agents are responsible 
 for the general condition of the buildings, yards, and 
 company property at their station, and look out for the 
 company's interests in their city or town. It is a part 
 of their duty to see that side tracks, switches, signals, and 
 lights at their station are kept in order; to see that cars 
 are properly placed for loading and unloading; to see that 
 loads placed in freight cars are such as to have them move 
 generally in a homeward direction; to see that cars before 
 loading are in proper order to receive freight; that loads 
 on open cars are within proper limits, and that cars are 
 not overloaded; and in cases where freight is found to be 
 damaged or short of quantity as billed, to make a complete 
 record of all conditions and circumstances. Proper wajj 
 
RAILROAD ORGANIZATION 241 
 
 bills must always accompany all freight packages or cars. 
 The agent is required to handle the United States mail 
 according to fixed rules. Each agent sends daily reports, 
 by telegraph if possible, to the car accountant, showing 
 freight cars wanted, on hand and to spare. lie also sends 
 daily repoi*ts on proper blank forms showing car initials 
 and numbers in detail of all arrivals and departures by 
 train numbers and of cars remaining at his station. From 
 the information so obtained, the car accountant is enabled 
 to properly distribute cars of the proper kind to the sta- 
 tions where most urgently needed with the minimum 
 length of haul, and also to direct the movement of freight 
 cars in a homeward direction. 
 
 The car accountant is also thus enabled to keep an 
 account of all cars and of the mileage of both home and 
 foreign cars. Based on these records of mileage kept by 
 the car accountant, settlements are made with foreign 
 roads for the use of cars at the rate of one-half cent per 
 mile. For the settlement of demurrage charges, station 
 agents are also required to send daily reports to the car 
 association, stating in detail car numbers and initials, dates 
 and time of day they are placed for either loading or un- 
 loading. The demurrage rule is that for loading or unload- 
 ing freight cars consignees or shippers are allowed ninety- 
 six hours after the car is placed in an accessible position, 
 and if the consignee or shipper requires more time, he is 
 required to pay for the detention at the rate of one dollar 
 per car per day. 
 
 The machinery department, as a part of the transporta- 
 tion department, is under the super^^ision of the superin- 
 tendent of motive power, and subordinate to him are the 
 general master mechanic in charge of locomotives and shops 
 and the master car builder. 
 
 The general master mechanic supervises the division 
 master mechanics and roundhouse foremen. The master 
 
 B.II-16 
 
242 GEORGE T. SAMPSON 
 
 car builder supervises the car shop foremen and car in- 
 spectors. 
 
 As a rule it may be stated that but few roads now build 
 their own rolling stock, finding it more economical to pur- 
 chase and have them built by contract with outside firms, 
 and finding their shop facilities generally kept busy up 
 to their capacity by their repair work. The extent and 
 importance of repairs on rolling stock can be realized when 
 I state that it is generally allowed by railroad men that 
 about 10 per cent of the entire number of locomotives are 
 in the shops for repairs constantly. 
 
 Shops for locomotive and car repairs of considerable 
 extent are located at points most favorable. Minor and 
 less important repairs on locomotives are made at the 
 roundhouses; such as can be made without placing them 
 out of service. Car inspectors' shops and outfits are main- 
 tained at terminals and junction stations with foreign 
 roads. 
 
 Locomotives seldom leave the rails of the home road. 
 At junction stations all cars arriving from foreign roads 
 must pass under the eye of the car inspector. As to size 
 of the car or its load, it must be within the advertised 
 clearance limits; and it also must be in safe and secure 
 condition in all its details, and not be overloaded beyond 
 its rated capacity; otherwise the car inspector orders it 
 to be sidetracked and the home road refuses to accept and 
 handle it until its defects are remedied by the foreign 
 road if it is a car defect, or by the shipper or consignee 
 at times if improperly loaded in a way for which they are 
 responsible. Car inspectors make repairs of injuries or 
 broken parts when such can be made by the replacement 
 of ready-made standard parts, of which they keep a stock 
 on hand. In case more extensive repairs are needed cars 
 are sent to the extensive main repair shops. 
 
 Speaking in a general way, it may be said that shops 
 for locomotive construction or repairs consist of the black- 
 
RAILROAD ORGANIZATION 243 
 
 smith shop, a foundry at times, the machino shop, and 
 the erecting shop; and for car work the bhicksmith shop, 
 the wood working shop, the erecting shop, and the paint 
 shop. Eacli of these shops has its foreman. 
 
 Division master mechanics and shop foremen need to 
 employ considerable office or clerical forces. In these 
 offices the payrolls and requisitions for material are made 
 out, and thence to the superior officers for approval and 
 through the usual channels hereinbefore mentioned. 
 
 Records and accounts of considerable interest are kept 
 in this department, among which may be mentioned the 
 method of guarantee and mileage account kept for the 
 purchase of wheels, in order to make sure that the utmost 
 care shall be taken at all times in their manufacture. 
 
ORGANIZATION OF A PURCHASING DEPARTMENT 
 ON RAILROAD SYSTEMS.* 
 
 BY EDWARD NORTON CHILSON. 
 
 [Purchasing Agent, J. A. White & Co.] 
 
 This subject, in the main, has been the basis of consid- 
 erable thought, study and discussion in railroad circles. 
 Many papers relating to it, from time to time, have been 
 placed before conventions and various railroad clubs 
 throughout the country, and to this day it is one of the most 
 interesting and probably the least understood of the com- 
 plex problems confronting the present-day railroad man- 
 ager. 
 
 A thoroughly equipped and competent department to 
 conduct the purchase of materials and supplies for large 
 trunk lines is, and undoubtedly always will be, an impor- 
 tant factor in the success thereof, and should be looked 
 upon by the railroad managers throughout the country not 
 only as one of the necessities but as one of the vital and 
 profitable functions of railroad business. 
 
 In the preparation of this paper attempt was made to 
 confine the thought entirely to the department, and the 
 methods employed therein for the strict enforcement of 
 departmental rules for the maintenance of a system where- 
 by the widest possible range of action may be confined 
 within limits which can be controlled by a minimum num- 
 ber of emi3loyes; and, if digression is resorted to, it is with 
 the purpose of emphasizing the importance of the various 
 elements which when properly arranged constitute the 
 system. 
 
 We should bear in mind that railroad managers are con- 
 stantly looking for weak spots in their complex organiza- 
 
 * Courtesy of Journal of Accountancy. 
 
 244 
 
A RAILROAD PURCHASING DEPARTMENT 245 
 
 tion, endeavoring to eliminate from the many departments 
 the employment of needless and incompetent help. It is 
 therefore of prime importance that the purchasing agent 
 carefully select intelligent and useful persons to carry out 
 the policy, and to adhere to the system laid down for the 
 departmental operation. 
 
 It is also a fact that the system, no matter how per- 
 fectly applicable to the work of a purchasing department, 
 will not be maintained at the highest stage of its efficiency 
 without the hearty co-operation of each and every em- 
 jDloye; for the best office systems fail when it is attempted 
 to make them so automatic as to invite neglect. Our start- 
 ing point, therefore, in the organization of a purchasing 
 department is the emplo\Tnent of a competent man to act 
 as purchasing agent. 
 
 The Purchasing Agent. 
 
 Tlie duties of an up-to-date purchasing agent are quite 
 difficult and should not be looked upon lightly, for, in addi- 
 tion to his being an administrative officer, he remains the 
 man of details. At least the writer's experience has been 
 such that he found it impossible to throw aside details, 
 owing to the fact that it is paramount for the department's 
 success for one to keep a hand on the pulse of the entire 
 organization; and those who cnteriain hopes of becoming 
 identified at some future time with this particular field may 
 be assured that hard work and conscientious endeavor are 
 "s'itally necessary. The work, however, is interesting and 
 pleasant and leads to higher posts and responsibilities in 
 railroad service. 
 
 The business training of a purchasing agent is of the 
 best; his duties are diversified, his field of action country- 
 wide, and his acquaintance among business men broad and 
 comprehensive. 
 
 It has been said that the purchasing agent, although a 
 responsible head of a railroad department, performs his 
 
246 EDWARD NORTON CHILSON 
 
 duties to greater disadvantage than do the heads of other 
 departments, and with less official recognition. This may 
 have been true in the early stages of American railroading; 
 but today it is different, as the purchasing agent, if a good 
 one, usually is recognized by his superiors, and his meri- 
 torious work is placed upon a high plane of achievement. 
 It is true that in the past, railroad purchasing agents have 
 not advanced in position and remuneration as have the 
 other department heads, such as freight and passenger offi- 
 cials, and officials in the transportation and mechanical 
 departments, but today the purchasing agent is valued 
 just as highly and is receiving remuneration according to 
 his merits. He should be one of the highly paid officials, 
 not because it is necessary to place a premium upon his 
 honesty, but because his work is important, his position 
 lofty in the true sense of the word, and his vocation one 
 that requires long years of training and careful study. 
 Through this department large sums of money are spent 
 annually, and the spending of this money for materials and 
 supplies is no easy task, provided judicious and economical 
 expenditure obtains. In this department large sums 
 annually may be saved or wasted. 
 
 The Assistant Purchasing Agent. 
 
 This man should be well endowed with alert mental and 
 physical capabilities. To him the work passes from the 
 hands of his chief. He should be a good executive, capable 
 of handling all departmental work in the absence of his 
 superior; an impartial judge and a watch dog. His duties 
 are many and diversified and equally interesting with those 
 of the purchasing agent. It is customary on the larger 
 railway systems for the purchasing agent to delegate cer- 
 tain lines of purchasing to his assistant, the details of which 
 he is supposed to follow and conclude, reporting all such 
 to his superior in the concrete. As it is necessary for the 
 purchasing agent to absent himself from the department 
 
A RAILROAD PURCHASING DEPARTMENT 247 
 
 at frequent intervals, the selection of a capable assistant 
 to conduct the business of the de])artin('nt during such 
 periods of absence, is of the utmost inipoilance. 
 
 The Chief Clerk. 
 
 Primarily it is the duty of this employe to carry on the 
 routine work of the department under the immediate super- 
 vision of the assistant purchasing agent, to whom he re- 
 ports, and to conduct such purchasing as may be delegated 
 by the assistant purchasing agent. He is responsible for 
 the detail work within the department, and the employ- 
 ment of all clerks, and necessarily nuist be a man with a 
 keen understanding of the system. 
 
 The Price Clerk. 
 
 The duties of this emi)loye consist chiefly in the send- 
 ing out of inquiries, the procuring of prices, the intelligent 
 tabulation of these for presentation to the chief clerk, the 
 assistant purchasing agent, or the purchasing agent. He 
 must be a man well acquainted with the material markets 
 of the country, with manufacturers and their products, and 
 should possess a full knowledge of the technical descrip- 
 tion of materials and supplies. It is also his duty to keep 
 a card index of prices, which serv^es as a barometer of the 
 various markets, and from which the invoices covering ma- 
 terials and supplies j^wrchased are checked and certified 
 as to their correctness prior to their being passed to the 
 purchasing agent for approval. 
 
 The catalogue file of the department should contain 
 catalogues of almost every manufacturing institution in 
 the country and must needs be kept up-to-date and in such 
 condition that easy reference may be made thereto, not 
 only as to manufacturers names, but as to the particular 
 materials and sup])lies handled. Therefore, in connection 
 with many such files may be found a cross reference sys- 
 tem, usually in the shape of a card index, in which the cata- 
 
248 EDWARD NORTON CHILSON 
 
 logues are refen^ed to by names, and cross references made 
 as to materials and supplies handled by each manufacturer. 
 This system is usually placed under the immediate jurisdic- 
 tion of the price clerk. 
 
 An inquiry list should be kept up-to-date by the price 
 clerk and his assistants, in which list should be found the 
 names and addresses of manufacturers of raihvay mate- 
 rials and supplies, alphabetically arranged and numerically 
 compiled, so that when a requisition is received from the 
 stores, mechanical, or any other department, it is only 
 necessary for the purchasing agent, assistant purchasing 
 agent or chief clerk to mark opposite the various items 
 thereon the numbers on the lists under which the various 
 items are classified. Inquiries are then sent into the 
 market, prices obtained and tabulated, and orders placed 
 with the lowest bidders, consideration being given to qual- 
 ity of materials and shipping dates. 
 
 The duties of other employes in the department, such 
 as stenographers, file clerks, accountants, etc., etc., while 
 important, cover such minute detail work as prescribed by 
 the system, that it is hard to explain them in a few words. 
 Consequently no attempt will be made to outline them in 
 this paper. 
 
 It might be well to refer to the requisition as the nu- 
 cleus around which the entire departmental work is cen- 
 tered. Eequisitions are issued by the various depart- 
 ments, setting forth in detail the materials and supplies re- 
 quired for the operation of the road, and are usually sent 
 directly to the purchasing agent, after being approved by 
 the proper officials. These requisitions should convey 
 complete information, including correct technical descrip- 
 tion, as well as shipping instructions and dates when ma- 
 terials are required at destination. The requisitions upon 
 reaching the purchasing department are put through the 
 system as previously described, for the placing of orders. 
 
 After the order is ;glaced the next move is to see that 
 
A RAILROAD PURCHASINa DEPARTMENT 249 
 
 no delay takes place in the fulfillment thereof. The "fol- 
 low-up" clerks are busily enc^aged in connnuni eating with 
 the vniious manufacturei-s in ascortainini^^ the probable 
 shipping dates and in tracing shipments after they are 
 made. The efficiency of the average purchasing depart- 
 ment could be materially increased by the employment 
 of competent men in sufficient numbers to follow shipments 
 from the time orders are placed until the material arrives 
 at destination. Such employes should be aggressive and 
 possess a good general knowledge of shop conditions and 
 transportation methods. 
 
 When we take into consideration the facts that the lack 
 of mateiials, such as bolts, nuts, jouraal bearings, sheet 
 steel, lumber, grate bars, wheels and axles, etc., might be 
 withholding from service locomotives and cars, and that 
 the railroad company loses revenue when such equipment 
 is withheld from service, the importance of placing or- 
 ders promptly and following shipments is self-evident. 
 This applies not only to the rolling stock, but to all mate- 
 rials and supplies purchased for other branches of the 
 sennce. 
 
 The writer has known cases where lack of small mate- 
 rials, due to slow action on the part of the purchasing de- 
 partment, withheld equipment from service, or delayed 
 shop peifoi-mance, and caused the railroad company to lose 
 considerable money. On the other hand, it is of equal im- 
 portance that the various departments anticipate their re- 
 quirements as far in advance as possible, in order that the 
 purchasing department may have opportunity for making 
 a careful solicitation of the market to obtain the lowest 
 prices and may still allow reasonable time for delivery. 
 
 The important railway systems of the country employ 
 an engineer of tests or chemist, to act as chief of the in- 
 spection bureau, under whom a corps of experienced in- 
 spectors is employed to pass upon the quality of materials 
 and detennine whether or not they meet the specifications. 
 
250 EDWARD NORTON CHILSON 
 
 This bureau assists the various departments in preparing 
 specifications. 
 
 It is the duty of the testing engineer to pass upon all 
 materials either prior to shipment from the works or after 
 arrival at destination. A great deal pro and con may be 
 said on this system, and while it has undoubtedly proved 
 benefi,cial to the railroads, it might be greatly improved 
 upon. 
 
 The importance of adopting uniform standards of prac- 
 tical design for articles used in large quantities is self-evi- 
 dent. These standards are recommended by the various 
 department heads. Wherever this is done it serves to 
 lessen the burden of the purchasing department, and, from 
 a commercial point of view, is indeed profitable, as it nar- 
 rows the field and permits the purchasing agent to make 
 annual contracts for known quantities (usually on a unit 
 basis or a sliding scale basis), and, moreover, it serves 
 to simplify the work in the purchasing department. The 
 adoption of standards also redounds to the benefit of the 
 railroad, as when manufacturers are furnished with speci- 
 fications of a given quantity of material or supplies, such 
 specifications minutely describing what is required, they 
 are placed in a position to submit the closest possible prices 
 upon which they can afford to take the business. On the 
 other hand, if the inquiry or the specification is vague and 
 incomplete, the manufacturer usually figures a liberal al- 
 lowance for uncertainties. Furthermore, if the manu- 
 facturers know that the railroad companies are adhering 
 to certain standards, which remain in use for a given length 
 of time, and that during that time there will be no change 
 of standard, they will usually quote their lowest figures 
 with the hope of securing orders continuously. Again, the 
 concentration of materials and supplies under standards 
 serves to establish uniformity, and lessens considerably the 
 task of placing orders, inspecting material, and following 
 shipments. 
 
A RAILROAD PURCHASINa DEPARTMENT 251 
 
 The tie and timber question is a serious one, especially 
 TN'ith railroads in the East and ^liddle West. The large 
 lines employ, under the jurisdiction of the jnirchasing 
 agent, a tie and timber agent, whose sole duty is too look 
 after the purchase of lumber, timber and ties. Some rail- 
 roads also employ a corps of inspectors to inspect such 
 materials prior to shipment, while, on the other hand, some 
 inspect and pass upon all such shipments at destination. 
 
 The purchase of fuel in some instances is a matter of 
 specialization. Some railroads employ a fuel agent to look 
 after their requirements in this line — this pex'son usually 
 reporting to the purchasing agent. 
 
 Relations With Stores Department. 
 
 The stores department is important and comes in for 
 its share of glory and criticism, and while it should not, in 
 the writer's judgment, come under the direct management 
 of the purchasing department, there should be the closest 
 haimony possible. Frequent conferences should take place 
 between the heads of these departments in order that the 
 most effective and economical methods may be pursued 
 in the handling of materials and supplies that are pur- 
 chased and delivered to the various store houses along the 
 line of road. In the store houses of the large trunk lines 
 may be found hundreds of thousands of dollars' worth of 
 materials and supplies for maintenance and operation, and, 
 as it is paramount that the jDurchasing department ^vork 
 along economical lines, a good service is rendered by keep- 
 ing in close touch with the stores department, to the end 
 that the actual use of materials and supplies may be clearly 
 understood. 
 
 Upon some railway systems the superintendent of 
 stores or general store-keeper reports to the purchasing 
 agent, but those instances are in the minority. It is con- 
 sidered by some that the duties of this department are 
 such that it should report directly to the general manager, 
 
252 EDWARD NORTON CHILSON 
 
 general auditor, or mechanical superintendent. It is tli6 
 writer's judgment that the head of this department should 
 report to the general auditor, as his duties practically 
 amount to those of an accountant in charge of distribution 
 of materials and supplies to the various departments. 
 
 There should also be the closest accord between the; 
 purchasing department and the auditing department, as 
 they have a great deal in common and the understanding 
 between the two should be complete. 
 
 Another important feature of the stores department 
 which engages the attention of the purchasing department, 
 is that of collecting and sorting scrap materials left from 
 the repairs of locomotives, cars, bridges and maintenance 
 of roadway, etc. Usually these collections are reported 
 to the purchasing department monthly, and, upon receipt 
 of such reports, systematically tabulated statements of the 
 various amounts of scrap iron and steel, copper, rubber, 
 steel rail, bagging, rope, etc., are made and sent to the 
 various points throughout the country where the best 
 markets obtain. A date is set for the sale and the material 
 awarded to the highest reputable bidders. Shipping in- 
 structions are then issued to the stores department and the 
 storage bins are once again emptied. To give you some 
 idea of the volume of this particular branch of the business, 
 the writer conducted the sale of scrap materials within a 
 period of two years, aggregating two million dollars, dur- 
 ing his connection with one of the large eastern steam rail- 
 road companies, and you may rest assured that no little 
 amount of work was entailed in the judicious handling 
 thereof. 
 
 Relations With Traffic Department. 
 
 The purchasing agent should keep in close touch with 
 the traffic officials to the end that the industries along the 
 line of road may be fostered and given opportunity to sell 
 the railroad such supplies and materials as they manu- 
 
A KAILROAD PURCHASmQ DEPARTMENT 253 
 
 facturc. This ia especially (l(\sirablo, as the industrial de- 
 partment is constantly on the lookout for new industries 
 to locate on the line and the purchasing department, hy 
 extending a helping hand to the manufacturers along the 
 line, serves a good purpose. 
 
 The industrial department usually operates under the 
 ."jurisdiction of the traffic department, and makes arrange- 
 ments with new industries, with the view of having them 
 locate at various points along the line, and all such new 
 branches of business serve materially to increase the 
 revenue of the road from both a freight and a passenger 
 standpoint. 
 
 It is the writer's idea that the purchasing agent should 
 keep in touch with the manufacturing industries along the 
 line; at least he should visit them often with some of the 
 traffic officials, as such ^dsits cannot help but promote good 
 feeling between the shippers and the traffic department. 
 We should remember that the manufacturing industries 
 on the line represent the backbone of tlie railroad, and all 
 railroads would do well to create an interest such as we 
 have outlined. 
 
 The writer does not believe, however, in paying more 
 money to these manufacturing companies for materials and 
 supplies which might be procured elsewhere for less money. 
 In other words they should not be paid a premium just be- 
 cause they happen to be located on the line. Piices may be 
 set, however, by the purchasing department from time to 
 time, at which they vriW place orders, and if the manu- 
 facturers along the line ^^'ish the railroad's business they 
 might have some of it at such figures. 
 
 We should remember that competition is the life of 
 trade and where solicitation is made among many manu- 
 facture!^ for prices on materials, the orders should be 
 placed strictly according to the merits of such competition; 
 and while the manufacturers along the line should be given 
 due consideration, and in some cases preference, they 
 
254 EDWARD NORTON CHILSON 
 
 should not be permitted to meet the other fellow's figures. 
 If this practice is resorted to, the trade soon becomes ac- 
 quainted with the fact and it is only a matter of time be- 
 fore the railroad company finds itself in difficulty. Oft- 
 times such methods restrict competition and cause many^ 
 manufacturing companies to withhold their best figures. 
 
 In the matter of extensive purchases, such as locomo- 
 tives, cars, shop machinery, etc., and supplies in current 
 use that may be purchased according to specifications, the 
 railroad companies would do well in certain instances to 
 place the business upon the basis of sealed proposals, such 
 proposals to be opened at an appointed time and in the 
 presence of all bidders. This statement is made advisedly, 
 due to the acts of favoritism that have from time to time 
 been brought to the writer's attention. We should con- 
 sider the railroad companies as public institutions, main- 
 tained for and fostered by the people, and surely the pur- 
 chase of material and supplies should be done with a view 
 of fairness to all. 
 
 The lines of demarcation in most of the larger railroad 
 organizations usually are well defined. They are not on all, 
 however, as on some roads the purchasing agent bears the 
 title only, and in fact ranks little above the clerk, as his 
 duties are limited to the purchase of ordinary materials 
 and supplies, and the more important contracts are nego- 
 tiated by the president, vice-president or general manager. 
 
 Previously the writer mentioned the fact that some rail- 
 roads employ tie and timber agents, and fuel agents, and 
 on some railroads it is not uncommon for such persons to 
 report to others than the purchasing agent. It is the 
 writer's firm belief that they should come under the watch- 
 ful eye of the general purchasing officer. 
 
 The importance of undivided responsibilities should 
 not be minimized, for if manufacturers and supply men are 
 given to understand that the purchasing department is theJ 
 final court of resort and the department through whicli 
 
A RAILROAD PURCHASING DEPARTMENT 255 
 
 they must do businoRs, it plaros a known (jiiantity of powor 
 in the hands of that department, which eannot help but 
 redound to the material benefit of the railroad at lar^e. 
 
 The mere fact that orders are issued by the purchasing 
 accent does not necessarily mean that all preliminaries per- 
 taining: to the issuance of such orders were handled by the 
 purchasing department, as in most instances the details 
 are whipped into shape and negotiations concluded by 
 othei's before the matter reaches the purchasing depart- 
 ment, and, in such cases, the title of purchasing agent is a 
 mockery and resolves itself into that of clerk. Such 
 cases, however, do not alw\iys prevail, as on some lines the 
 various departments have been brought to see the advan- 
 tage that obtains in recognizing the purchasing department 
 as the department to conduct from the initial all the stages 
 that lead up to the conclusion of the material contracts. 
 This recognition may have been due as much to the aggres- 
 siveness of the purchasing agent as to the co-operation on 
 the part of the management at large. 
 
 The following excerpts from rules and regulations in 
 vogue on a prominent trunk line serve to bear out the 
 writer ^s remarks on the importance attached to the pur- 
 chasing department: 
 
 I. In making contracts and purchases the pur- 
 chasing agent will be guided by his best judg- 
 ment, taking into consideration quality, prices 
 and the recommendations of the responsible 
 heads of departments. 
 n. Negotiations regarding contracts and purchases 
 and the correspondence relating thereto will 
 be conducted by the general purchasing agent; 
 requests for infoiTnation about articles, the 
 use of which may be contemplated, will be 
 made through him. 
 m. Information relating to quality and perform- 
 ance of materials, supplies, tools, track appli- 
 
256 EDWARD NORTON CHILSON 
 
 ances, etc., etc., will be furnished to outside 
 parties by the general purchasing agent only, 
 and all requests for information made by such 
 parties, either verbally or in writing, will be 
 referred to him. 
 With such regulations in effect there is little or no 
 danger of friction between the various departments as re- 
 gards their material requirements. Railroads would do 
 well in abolishing systems whereby the suppliers are al- 
 lowed to go over the head of the purchasing agent for their 
 information, which information, if given directly to sup- 
 pliers by another department head, might serve to work 
 contrary to the understanding had with the supplier by 
 the purchasing agent. 
 
 Department officials should make proper requests for 
 materials and supplies of the purchasing agent, and where 
 circumstances warrant, submit recommendations; but be- 
 yond this, in the matter of purchases, they should not go. 
 The purchasing agent should be left with free hands for 
 action, accounting only to his superior. 
 
 On every w^ell-organized railroad you will find an official 
 in charge of finance, one in charge of operation, another in 
 charge of traffic, and so on, and their sole duties lie in man- 
 aging a particular and well-defined line of work. So there 
 should be one man w^ho stands out prominently in the rail- 
 road field as a purchasing officer, whose duties should em- 
 brace all those that bear relation to the purchase of ma- 
 terials and supplies. 
 
 The writer has covered, in his judgment, the important 
 points with regard to the duties of the purchasing depart- 
 ment. The main issues have been touched upon. On the 
 whole, the field might be referred to as one that calls for the 
 exercise of common sense and business acumen and the 
 faithful performance of duties, and the encompassing of 
 a system capable of being developed and enlarged as busi- 
 ness goes on and the railroad expands. 
 
THE PROMOTER IN MODERN BUSINESS. 
 
 HARRISON S. SMALLEY. 
 
 [Professor of Transportation, University of Michigan.] 
 
 A promoter is one who inaugurates a business enter- 
 prise. The enterprise may be of any character, and may 
 be conducted by an individual, a partnership, or a corpora- 
 tion. But the promoters of whom we hear most are those 
 who give the corporate form of organization to the enter- 
 prises which they establish. 
 
 The promotion of a business concern is not the simple 
 matter which many suppose. It is a complex and compli- 
 cated task which in many cases consumes a great deal of 
 time, necessitates the disbursement of a not inconsider- 
 able sum of money, requires the expenditures of much 
 mental and physical energy, and calls for the exercise of 
 a variety of talents. For the work of promotion begins 
 when the project has just been conceived as an idea in 
 some one's mind; and it does not end until that idea has 
 been developed and worked out, and has taken form in 
 an actual industrial concern which is established and ready 
 for business. In the interval many steps have been taken, 
 some with the greatest patience and toil, and much has of 
 necessity been accomplished. 
 
 The work of a promoter falls into three main divisions. 
 His first task is to satisfy himself that a business oppor- 
 tunity exists which is worth developing; when that is done 
 he must fonnulate a proposition with reference to that 
 opportunity, working out all of its features in detail; and, 
 finally, he must interest capital in his i)rop()siti()n, or else 
 undei'take it with his o\vri funds, thus establishing the 
 enterprise which he has had in mind. We shall discuss 
 in order these three phases of a promoter's work. 
 
 257 
 
258 HARRISON S. SMALLEY 
 
 Considerations of the Promoter. 
 
 In order to satisfy himself that a business opportunity 
 exists which is worthy of exploitation, the conscientious 
 promoter must examine the project from three different 
 points of view — the technical, the commercial and the legal. 
 "WTien considering it from the technical point of view the 
 question which he should ask himself is this : Is the scheme 
 practicable; or are there mechanical, chemical, engineer- 
 ing or other similar obstacles which would militate against 
 its success? In many cases, such as the promotion of a 
 furniture factory or general merchandise store, this ques- 
 tion is of no significance; but in many others, it is of con- 
 sequence, and occasionally it is a matter of vital concern. 
 This is especially true in mining, in some bridge, tunnel, 
 and railway enterprises, and in propositions involving 
 newly patented articles or processes. Hence, at this in- 
 itial point in the promoter's work mistakes of judgment 
 may be made which will mean the utter failure of the 
 undertaking. And for this reason all careful promoters 
 consult freely with technical experts and do not proceed 
 unless their judgment is favorable. 
 
 Assuming that his plan appears to be feasible, the pro- 
 moter must next consider it from the commercial point 
 of view, giving attention to the important question: If 
 such a concern were established would it prove profitable ? 
 To answer this question properly involves a searching in- 
 vestigation into all the multitudinous factors affecting the 
 cost of production, the selling price, and present and future 
 market conditions. He must not only consider factory 
 costs, the volume of present production, and current prices; 
 he must reflect upon whatever tendencies, with reference to 
 these matters, are disclosed by the records of recent years. 
 He must even go beyond that and consider the matter of 
 raw materials, their sources and abundance, and the ex- 
 tent to which they have passed under monopolistic con- 
 
THE PROMOTER IN MODERN BUSINESS 259 
 
 trol; he must look carct'ully into the transportation situ- 
 ation, and into the la])or conditions; and nuist detcnnine to 
 what extent the market for this ehiss of goods lias felt or 
 is likely to feel the influence of the monopoly movement. 
 His A'iew nnist even broaden so much as to take in the 
 trend of general industrial conditions. It would he im- 
 possible to enumerate all of the considerations to which 
 he must give weight, but the few^ that have been mentioned 
 will serve to convey some impression of the arduous and 
 complicated task w^hich at this stage confronts the pro- 
 moter. 
 
 But even if he concludes that his project will prove 
 profitable as well as practicable he is not quite ready to 
 proceed with it. He must assume a third viewpoint, and 
 consider the proposition in its legal aspects. This, of 
 course, involves consultation with lawyers, whose services 
 are often of great value. If the enterprise necessarily 
 requires the use of certain properties, it is important that 
 careful search be made of the titles to such properties, 
 to ascertain whether the proposed concern can secure un- 
 clouded rights. If its success depends upon the employ- 
 ment of new inventions, their patentability should be 
 carefully considered. If the undertaking involves con- 
 tracts with certain corporations, it must be deteiTnined 
 that contracts of the kind contemplated are within the 
 powers of the corporations concerned. If the success of 
 the enterprise depends to any important extent on certain 
 contracts, the promoter should demand assurance that 
 those contracts are not in violation of existing law, or of 
 proposed legislation. In general, the legality of the whole 
 scheme is of great, and sometimes of vital importance, 
 especially in these days of anti-trust legislation. Still an- 
 other point on which the promoter might well seek legal 
 advice is the liability to public regulation of a concern 
 such as he has in mind. This is an era in which the Gov- 
 ernment is extending its controlling arm over an increas- 
 
260 HARRISON S. SMALLEY 
 
 ingly large number of forms of business, and the law on 
 the subject of government control is also in a process of 
 evolution. In view of these two facts advice on the mat- 
 ter of public regulation is sometimes of great importance. 
 These illustrations will perhaps sufficiently enforce the 
 statement that it is frequently necessary for the promoter 
 to seek the aid of lawyers in examining the legal aspects 
 of his proposition. 
 
 If, when all is done, the promoter is convinced that 
 his project is feasible and legal and that it bids fair to be 
 profitable, he may properly proceed to develop it. But 
 needless to say, promoters do not always wait to be thus 
 convinced before going on with their plans. Much harm 
 is done to legitimate business, and much loss inflicted on 
 investors, by promoters who carelessly launch enterprises 
 mthout sufficient investigation of their merits, or who 
 deliberately inveigle persons into concerns which the pro- 
 motors have reason to suspect are doomed to failure. Such 
 promoters are a menace to business and should be punished 
 to the full extent of the law. 
 
 Moreover, it should be noted that even when the pro- 
 moter is painstaking and conscientious in examining the 
 various features of his project, his final decision may not 
 be correct. For from all that has been said it should be 
 evident that his decision cannot be reached by mathematic- 
 al processes. It is a matter of discretion, of sagacity, of 
 sound business judgment. Only one who has had much 
 experience, who has true business instincts, and who has 
 some measure of business genius, can weigh the manifold 
 considerations which present themselves, assign its proper 
 weight to each, and at last derive from them all a reliable 
 conclusion. 
 
 The fact, then, that a promoter has been diligent and 
 honest in his work is no guaranty that his proposition de- 
 serves favorable attention. His own ability to judge of its 
 merits is an equally important consideration. 
 
THE PROMOTER IN MODERN BUSINESS 261 
 
 Formulation of the Scheme. 
 
 ITa^^ng satisfied himself that the ])i-oposed enterprise 
 is one which ought to be launched, the promoter enters 
 upon the second part of his task — the formulation of the 
 scheme in the shape of a definite, complete proposition, 
 in wliich it ma}- be possible to interest persons who have 
 money to invest. The drafting of such a plan involves 
 the determination of all the essential features of the enter- 
 prise. 
 
 The first step is to select the property or properties 
 which will be employed in the business. In some cases, 
 for example, in mining propositions, the promoter will 
 have chosen the property before he reaches this point in 
 his proceedings, but in many others the exact site of the 
 plant may not be determined until after he has finished 
 the first stage in his work. Needless to say, much depends 
 upon the selection of properties, and serious errors may 
 easily be made. An unfortunate location may be chosen; 
 or the entei-prise may be started on too small or too large 
 a scale; or the properties selected may not have all the 
 meritorious qualities attributed to them. But having 
 solved the problem and picked out the properties whicli 
 are to fonn the basis of his proposition, the promoter must 
 next determine how much mone\', beyond that needed to 
 buy the properties, will be required to provide such build- 
 ings, equipment and working capital as may be necessary. 
 
 At this point, if the promoter is working in his own 
 behalf and ex])ects to become the sole propi'ietor of the 
 contemplated l)usiness, he may proceed at once to acquire 
 the property, erect the necessary structures, purchase the 
 requisite equipment and dedicate to the undertaking what- 
 ever working capital is required. Tie is then ready to ])e- 
 gin business, and the work of promotion is completed. 
 
 But if, on the other hand, he intends to draw others 
 into the plan, and especially if he intends to fonn a corpora- 
 
262 HARRISON S. SMALLEY 
 
 tion to conduct it, he must take other steps after selecting 
 the properties and determining the amount of capital re- 
 quired. The first thing which he must do is to bring the 
 chosen property within his control. This is necessary be- 
 cause it will take some time for him to interest others in 
 the scheme, and meanwhile the property may pass into 
 the hands of persons who will not part with it except at 
 an impossible figure. Moreover, investors will hardly 
 listen to his solicitations unless he can assure them that 
 they can have the property at a certain price. For these 
 reasons he must either purchase the property outright, or 
 must secure an option upon it, which will give him the privi- 
 lege of buying the property at a stated price, on any day 
 within a certain fixed limit of time. He will usually choose 
 the latter alternative, for a direct purchase involves con- 
 siderable capital, while an option can often be procured 
 for a nominal consideration. 
 
 If now, the promoter is planning to have the business 
 conducted by a partnership, he is in a position to go to va- 
 rious persons, present the proposition to them, and en- 
 deavor to interest them in it. If he succeeds a firm will 
 be formed, the members will contribute the necessary cap- 
 ital, and will take off his hands the property which he has 
 purchased or optioned, compensating him for his labor and 
 expense in connection with the enterprise. His work as 
 promoter will then be finished, and the firm will proceed 
 to begin operations, after doing whatever is necessary in 
 the way of adding buildings or equipment to the property. 
 
 But if, again, the promoter is contemplating the cor- 
 porate form of organization not a little remains to be done, 
 after securing control of the property, before he can make 
 his appeal to investors. 
 
 In the first place, he must select the state in which to 
 form the corporation. At first blush it might seem natural 
 for him to incorporate in the state where the business is 
 to be located; but on the contrary, there are considerations 
 
THE PROMOTER IN MODERN BUSINESS 263 
 
 which often lead him to go elsewhere for his charter. He 
 is at li])erty to incorporate wherever he pleases, for it is 
 the almost invariable practice of our states to admit freely 
 the corporations formed by all the other states; and, in- 
 deed, no state can prevent an outside corporation from 
 engas^ing in interstate commerce within its borders. The 
 promoter, therefore, can resort to the state which offers 
 the most attractive inducements. Now the policies of our 
 states differ widely in the matter of incorporation. Some 
 states have laws which are ''strict"; others have laws 
 which are ''liberal." Some exact high incorporation fees 
 and annual franchise taxes, while others have reduced 
 their charges to a merely nominal amoimt, many states, 
 in fact, imposing no annual tax at all. Promoters, there- 
 fore, naturally gi'avitate to certain states. They tend to 
 go where fees and taxes are low and where "liberal" laws 
 are held out as an inducement. Indeed, certain states have 
 made incorporation by outsiders so simple, easy and inex- 
 pensive, and have also offered so many other attractions, 
 that each of them annually creates many corporations 
 which are not designed to transact any business at all with- 
 in the state of their birth. 
 
 Unfortunately the "inducements" offered by the "lib- 
 eral" laws of these states are chiefly such as to appeal 
 most strongly to the worst types of promoter — those who 
 are endeavoring to foist upon the public some visionary, 
 or fraudulent, or inflated proposition. Such laws make 
 it possible for a corporation to begin operations — to ne- 
 gotiate contracts and to incur debts — without a dollar of 
 property or a cent in cash; they make it possible for the 
 promoter to offer for sale at one cent, or at any other price, 
 shares of stock with a par value of one dollar, such shares 
 of stock being legally regarded as "fully paid"; they make 
 it possible for a cnr]K)ration to advertise that it has a capital 
 stock of $10,000,000 ''fully paid up," when in point of fact 
 not a cent in money or even in propei^ty has ever been re- 
 
264 HARRISON S. SMALLEY 
 
 ceived for the stock; and thus they allow an unlimited 
 amount of stock-watering and overcapitalization, with the 
 invariable profits to those on the inside, and corresponding 
 losses to those on the outside — opening the way, among 
 other things, to the taking of excessive compensations by 
 promoters. They also pemiit a corporation to own the 
 stock of other companies without limitation, thereby mak- 
 ing easy the formation of monopolistic combinations, and 
 they furthermore make it possible for those in control of 
 a corporation to oppress and virtually defraud the smaller 
 stockholders, with entire impunity. These are some but 
 not by any means all of the ''attractions" offered by some 
 of our states to outside incorporators. New Jersey at 
 once suggests itself to the mind as the state which has led 
 in this matter; but other states are now to be classed with 
 it. Maine, Massachusetts, Connecticut, New York, Dela- 
 ware, the District of Columbia, Virginia, West Virginia, 
 South Dakota, Arizona and Nevada have all gone too far 
 in "liberalizing" their corporation laws. 
 
 The promoter, therefore, instead of finding it easy to 
 select the state of incorporation, is confronted by so many 
 rival attractions, and beset by so many temptations that 
 he is often wholly bewildered. He naturally wants to go 
 where incorporation will prove cheapest, and if there is 
 anything shady about his proj)Osition, or if he is ambitious 
 to reap an excessive personal profit from his transaction, 
 the liberal states present compelling allurements. In the 
 end he must decide upon some one state ; and it is a matter 
 of regret that so many promoters go to the states whose 
 laws afford the ordinary investors no protection against 
 the cupidity of the promoter or the dishonesty of corpo- 
 rate managers. 
 
 Having selected the state of incorporation the promot- 
 er's next step is to determine the capitalization of the pro- 
 jected corporation, that is, the amount of stocks and bonds 
 to be issued, for the capitalization of a corporation is the 
 
THE PROMOTER IN MODERN BUSINESS 265 
 
 sum of the par values of all the outstanding stocks and 
 bonds. 
 
 There are several theories as to the proper capitaliza- 
 tion of corporations, but they all group themselves about 
 two ideas. One idea is that capitalization should equal 
 tlie cost or value of the property; the other, that it should 
 be based upon the earnings of the company, that it should, 
 in fact, be nothing more or less than the capitalization 
 of the eaniings at some selected rate per cent. 
 
 If the promoter adopts the first idea— which is the 
 more conservative one — his task will be relatively easy. 
 In forming the corporation he will provide for the imme- 
 diate issue of securities with total par values just equal 
 to the sum needed for the inauguration of the enterprise, 
 that is, a sum sufficient to cover the price of the selected 
 property, the cost of desirable structures and equipment, 
 the amount needed for working capital, and a reasonable 
 compensation for himself. But as a matter of fact the 
 promoter is usually tempted to accept the second idea — 
 to base the capitalization on prospective earnings. And 
 as soon as he undertakes to estimate prospective eara- 
 ings his enthusiasm and his cupidity run away with him; 
 and he forms an estimate of earnings which is altogether 
 too high, and the resulting capitalization is correspond- 
 ingly excessive. In brief, he is tempted to overcapitalize. 
 
 This temptation is due in part to his desire for as large 
 a personal profit as possible. It is easy for him to add to 
 the proper capitalization a few thousand shares of stock 
 and appropriate them as a part of his compensation. So 
 long as the additional securities thus issued are not pre- 
 posterous in amount, they are not likely to endanger his 
 success. Another motive is his anxiety to sell his securities. 
 It may be that there is some weak spot in his ]ii-oject whieh 
 will cause true investors to beware of it. In such a case he 
 can inflate the capitalization and so offer the temptation 
 of cheap stock to persons of a speculative l)ent. 
 
266 HARRISON S. SMALLEY 
 
 The impulse to base capitalization on earnings, rather 
 than on cost, is especially strong when a promoter is not 
 starting a new entei'prise but is simply forming a corpora- 
 tion to take over one or more going concerns. In such a 
 case the books of the several concerns show their records 
 of earnings, and if those records go back far enough and 
 cover bad years as well as good, a capitalization based on 
 the average earnings thus disclosed would be fairly con- 
 servative. But here, again, there is the same temptation 
 to issue an excessive amount of securities. A striking 
 illustration of this may be found in the procedure of most 
 of the promoters who effected the great consolidations 
 kne^Ti as trusts. Usually the record of earnings consid- 
 ered by the promoter covered only a year or two of pros- 
 perous times. Even so, however, he was not content with 
 a capitalization based on the earnings thus disclosed, but 
 formed an estimate — usually extravagant — of additional 
 earnings which were to come as a result of the consolida- 
 tion; and those visionary earnings he also capitalized. 
 There was present here the added motive of issuing enough 
 stock to satisfy all the owners of the several concerns and 
 so induce them to come into the consolidation. The result 
 w^as that most of the trusts were floated in a sadly over- 
 capitalized condition. 
 
 Beset, then, by the temptation to issue too many securi- 
 ties, the promoter must fix the capitalization of his corpora- 
 tion. In doing so, however, he finds it necessary to take 
 into consideration another matter — the various kinds of 
 securities which his projected corporation is to issue. This 
 also is a question of some difficulty. Stocks are of two 
 kinds, common and preferred, and preferred stock is 
 sometimes of two sorts, first and second preferred. Bonds 
 also fall into two classes — ^mortgage bonds and non-mort- 
 gage, or ''plain," bonds — and there are many kinds of 
 mortgage bonds. Now each species of stock and bond has 
 its own peculiarities and is designed for certain particular 
 
THE PROMOTER IN MODERN BUSINESS 267 
 
 uses. And therefore from the loni^ list of dilTcrcnt kinds 
 of securities the promoter is oblijjjed to select those which 
 seem best adapted to the needs of his own proposition. 
 
 The promoter must next attend to certain matters which 
 are not likely to prove so difficult. He must choose a name 
 for his corporation, must select the persons who are to act 
 as incorporators, must also decide upon the members of 
 the first board of directors, and must determine upon a 
 place for the location of the corporation's lethal office in 
 the state of incorporation. In deciding all these matters 
 he must comply with the requirements of the statutes in 
 the state which he has chosen as the home of the corpora- 
 tion; and he must also determine any other questions which 
 those statutes make it necessary to consider. 
 
 The promoter is then, at last, in a position to give final 
 form to his proposition by actually forming the projected 
 coiporation. On the surface the process of forming a cor- 
 poration is a simple one. A document must first be drawn 
 up setting forth certain essential facts regarding the pro- 
 posed corporation. Blanks for this purpose are usually 
 furnished by the state. Tliis document, known generally 
 by the name of "articles of association," must be signed 
 and acknowledged by the incorporators, and then filed 
 with the secretary of state or some other public officer. 
 At the same time certain prescribed fees must be paid. 
 The cori^oration -is thus brought into existence, and the 
 incorporators may meet at once and, as members of the 
 corporation, begin their contemplated activities. In most 
 states this is all that need be done to fonn a corporation. 
 
 Yet the process is not always as simple as it seems. In 
 large corporations, with complicated affairs involving very 
 important interests, the drafting of the articles of asso- 
 ciation in such a manner as to accomplish the desired ends 
 and at the same time avoid all legal pitfalls becomes a 
 matter of great delicacy and no little difficulty. It is also 
 of the greatest importance that the initial meeting shall 
 
'2m HARRISON S. SMALLEY 
 
 be so conducted as to launch the corporation in just the 
 way contemplated by the promoter, and yet that its pro- 
 ceedings shall be in full harmony with all legal require- 
 ments. In fact, every step involves so many possibilities 
 of legal complications that often the promoter employs a 
 lawyer who is expert in corporation practice, and turns 
 over to him the entire task of forming the corporation. 
 
 It might seem that a special difficulty would confront 
 a promoter who had decided to incorporate in some other 
 state, on account of the distance he would have to travel 
 to perfect his incorporation; but this is not often the case. 
 In most, if not all of the states which have liberalized their 
 laws, concerns have sprung up which make it their busi- 
 ness to attend to incorporations for outside parties. Need- 
 less to say, some of them are reliable and some are not, 
 but those which are trustworthy prove a great convenience 
 to outside incorporators. They are thoroughly familiar 
 with the laws of the state, and so can properly conduct the 
 necessary proceedings. Moreover, if the statute specifies 
 that one of the incorporators must be a resident of the 
 state — which is usually the case — such a concern supplies 
 a local ''dummy" to serve the purpose. If, furthermore, 
 the statute provides that one or more directors must be 
 residents of the state, and that the corporation must keep 
 a resident agent within the state, the concern provides 
 dummies to fill these positions. And since statutes also 
 require that each corporation maintain a local office within 
 the state, such a concern offers its ovm. quarters as the lo- 
 cation of that office. For these and sometimes other serv- 
 ices a compensation is charged which is usually moderate 
 in comparison with their value to outside parties. 
 
 It must not be supposed that the use of dummies is 
 confined to cases in which they serve as an accommodation 
 to persons residing at a distance. They are often used 
 simply to conceal the real parties in interest, when those 
 parties, for some reason not usually commendable, do not 
 
THE PROMOTER IN MODERN BUSINESS 269 
 
 wish to have their conncctiou with the.' cuterprise generally 
 known. 
 
 ''Floating" the Proposition. 
 
 Having actually brought his corporation into existence 
 the jn-onioter has coiu]i]rte(l the second main division of 
 his work. He has fornudated a plan and nuist now under- 
 take the third part of his task, which consists in "floating" 
 his proposition. That is, he must interest outside persons 
 in the scheme, must dispose of the securities to them, and 
 then must turn over the enterprise to the stockholders, 
 who thenceforth will control its destiny. 
 
 At the outset the promoter must devote himself to the 
 preparation of a prospectus. It is very difficult to define 
 a prospectus, because it presents different aspects, de- 
 pending upon the point of \dew from which it is regarded. 
 From the standpoint of the promoter it is an advertise- 
 ment of the securities of his corporation; and inasmuch as 
 he thinks of it in that way he naturally gets it up in such 
 a manner as to make it an effective advertisement. He 
 wishes it to succeed in inducing people to buy his stocks 
 and bonds, and hence he makes it just as convincing and 
 just as alluring as he can. Unless he is the possessor of 
 an exceptional conscience, he tends to omit all references 
 to the imt'avorable aspects of his proposition, and to lay 
 great stress upon its more attractive features. He even 
 finds himself painting a rosy picture of the future of the 
 corporation, and arousing the cupidity of prospective in- 
 vestors by holding out to them the hope of enormous profits. 
 Some promoters, especially of the cheaper propositions, go 
 even farther and adopt what thov deem to be f-lever ad- 
 vertising methods and expedients, which are surprisingly 
 effective with the less sopliisticated classes of persons. 
 Still others, on the contrary, assume an air of great dig- 
 nity and present a very businesslike and imposing doeu- 
 ment, which looks reliable but may be just as treacherous 
 
270 HARRISON S. SMALLEY 
 
 as the most extravagant and visionary variety. In short, 
 so long as the prospectus is looked upon as an advertise- 
 ment it will naturally take whatever form, and be given 
 whatever tone and air, the particular promoter believes 
 will appeal most strongly to the class of persons he in- 
 tends to approach. 
 
 But from the point of view of the prospective investor 
 the prospectus is not merely an advertisement. It is the 
 chief and sometimes the only medium through w^hich he 
 can gain an impression of the proposition. If it is inade- 
 quate and delusive and beguiling, he may invest his money 
 and presently find himself a heavy loser. While, then, 
 the promoter is allowed by our ''liberal" laws to draft any 
 sort of prospectus that he wishes, a decent regard for the 
 moral obligation which he owes to the investing public 
 would lead him to make his prospectus truthful and com- 
 plete. Indeed, it may be remarked, there is need for laws 
 under which no prospectus could be issued which did not 
 truthfully disclose all of the facts required for the forma- 
 tion of a sound investment judgment. 
 
 Armed with his prospectus the promoter must next 
 proceed to sell his securities, except such as are to be 
 issued directly in exchange for the property which the 
 corporation is to acquire. There are various ways in which 
 securities may be sold. In small concerns, especially if 
 they are of local character, such as a factory to be owned 
 by the residents of the town where it is located, the com- 
 mon and also the cheapest method of selling the stock is 
 through personal solicitation. But that method is imprac- 
 ticable in other small concerns, manufacturing and other- 
 wise, which are so situated that they must appeal to a 
 wider investing public, or which by their very nature must 
 collect their capital from scattered sources, which is the 
 case with many mining and similar enterprises. In such 
 situations the promoter sometimes attempts solicitation 
 by correspondence, getting the names of his correspond- 
 
THE PROMOTER IN MODERN BUSINESS 271 
 
 ents from replies to advertiseineuts, or from the jiriuted 
 list of names and addresses which are in common circula- 
 tion in the business world. Often, however, he engages the 
 ser\'ices of one or more agents, who endeavor to sell 
 his stock for a connnission, or on some other basis. There 
 are many individuals and concerns throughout the coun- 
 try which make it a business to act as agent in this capa- 
 city. Such individuals or concerns usually advertise them- 
 selves as brokers, or stock brokers, or *' bankers," or fiscal 
 agents, or finance companies, or securities companies. Some 
 of them handle only high-grade securities and deservedly 
 enjoy an excellent reputation. Unfortunately, however, 
 the majority are not of that type. 
 
 Still another method of disposing of securities, and the 
 one most commonly used in connection with large corpora- 
 tions, is underwriting. Underwriting is the guaranteeing 
 of the sale of stocks or bonds. Sometimes a single banker 
 or banking house will underwrite an entire issue, but more 
 commonly a group of bankers kno^^^l as an underwriting 
 syndicate is fonned, under the leadership of one who is 
 known as the syndicate manager. As sometimes arranged, 
 each member of the syndicate agrees to take at a fixed 
 price a certain portion of all the securities remaining un- 
 sold at specified date, and for this promise he receives a 
 consideration in money or stock. In other cases the mem- 
 bers of the syndicate virtually buy the securities and pay 
 a stipulated price, usually borrowing money for the pur- 
 pose. The manager then attempts to negotiate the sale 
 of the securities, but if at the expiration of an agreed pe- 
 riod any remain imsold they are distributed among the 
 membei-s in a fixed proportion. The syndicate's compensa- 
 tion for this service consists in the difference between the 
 purchase and selling prices, though frequently bonuses of 
 stock are also given especially to the syndicate manager. 
 
 In one way or another, then, the promoter sells, or ar- 
 ranges for the sale of the securities, and thus provides the 
 
272 HARRISON S. SMALLEY 
 
 corporation with the needed capital. Of course, if his plan 
 develops serious defects, or if he happens to bring it out 
 at a time of financial unrest or industrial depression, he 
 may fail to dispose of the securities, and in consequence 
 his scheme may fall through entirely or its realization may 
 be postponed for a long time. But in good times the pro- 
 moter of a really worthy enterprise has no serious difficulty 
 in gaining an audience among people with money to invest. 
 Moreover, in times of prosperity, the promoter with a 
 proposition so risky that real investors look askance at it, 
 can often find speculators who are willing to listen to him. 
 Having sold the stock and thus placed the corporation 
 in the hands of those who are to control it, the work of the 
 promoter is almost finished. But one thing further is nec- 
 essary. If he has not already done so, he must transfer to 
 the corporation the properties which he previously pur- 
 chased or optioned with the intention of holding them for 
 the use of the contemplated corporation. 
 
 The promotion is now complete. The idea which the 
 promoter originally entertained, and which at first was a 
 mere idea, has borne substantial fruit — a fully organized 
 corporation has been established, with the property and 
 capital needed to conduct the enterprise which the pro- 
 moter has had in mind. 
 
 Usefulness of the Promoter. 
 
 From all that has been said it is plain that the pro- 
 moter's task is many-sided, and that it is difficult and 
 laborious. It should also be evident that his activities are 
 necessary in any growing community. Yet many persons 
 manifest a disposition to look upon the promoter as a use- 
 less encumbrance, in fact as something worse than that — 
 a leech, a parasite on legitimate business, performing no 
 real service, but getting a living out of the rest of the peo- 
 ple. That this is a mistaken view should now be clear. 
 The work which he does is not useless; it is indispensable 
 
THE PROMOTER IN MODERN BUSINESS 273 
 
 if busiiK'sy is really to jn'ogress. It' industry is to develop, 
 if the number of business concerns is to increase, promo- 
 tions must constantly be undertaken. No })lant or busi- 
 ness house, small or large, can be established without first 
 being promoted. 
 
 Tlie misconception Avhich exists with reference to this 
 subject has probably arisen from the fact that in many 
 cases i^romoters are merely promoters, and do not expect 
 to be actively connected with their enterprises after their 
 work as promoters is finished. In practice this is a matter 
 of ver}^ highest importance. If one is promoting a busi- 
 ness in which he expects to invest funds of his own, and 
 so to become sole o\Maer, or at any rate part owner, his 
 conduct as promoter will naturally be characterized by 
 honesty, sincerity and thoroughness. But if one is start- 
 ing an enterprise in which he does not plan to invest any 
 mone}^ but which he ex])ects to turn over to others as soon 
 as possible, taking from them a compensation for his labors, 
 there is not the same incentive to exemplary behavior as 
 a promoter. On the contrary, he is su1)jected to the temp- 
 tation to make everything he can out of the transaction, 
 even if at the expense of those whom he draws into the 
 plan. And he is furthermore encouraged to yield to this 
 temptation by incorporation laws which make it easy for 
 him to prey upon the investing and speculating public. 
 A promoter is often al)le to sell the securities of a corpora- 
 tion which is an absolute fraud, or which is so visionary 
 or risky that no one with a true understanding of the enter- 
 prise would for a moment have anything to do with it. Tie 
 is enabled to do this by laws which in no way control his 
 prospectus, which allow him the greatest li])erty in mak- 
 ing his approach to his victims, and wliidi impose no ade- 
 (|unte penalties to deter him from conduct which is vir- 
 tually if not legally dishonest; laws, moreover, which make 
 it possible for him to offer "full paid" stock at a trivial 
 fraction of its par value, in this and other ways appealing 
 
274 HARRISON S. SMALLEY 
 
 to the cupidity of the people and to that thirst for sudden 
 wealth which is so common a feature of human nature. 
 
 Furthermore, even w^hen the promoter is floating a 
 meritorious proposition, he is able to cheat those who pur- 
 chase his securities by taking for himself an altogether 
 unreasonable and exorbitant compensation. After the 
 corporation is formed he can easily retain control over it, 
 through the agency of dummy directors, for at least a brief 
 period, during which time he may have issued to himself an 
 excessive amount of stock, or may transfer to the corpora- 
 tion the property he has bought or optioned, at a figure 
 in excess of the purchase or option price, or he may do 
 both of these things. It is true that the law does not look 
 with favor on such transactions, but in the vast majority 
 of cases the law as it now stands is powerless to prevent 
 them; and, moreover, the statutes of our ''liberal" states 
 actually encourage them by permitting the promoter to 
 overcapitalize at will. 
 
 Of course the promoter is entitled to receive a sub- 
 stantial sum from the corporation. He clearly has a right 
 to be reimbursed for money necessarily expended for cleri- 
 cal help, expert and legal counsel, traveling expenses, in- 
 corporation fees, printing and postage, and the like, with 
 interest at a reasonable rate. He can also justly claim a 
 fair remuneration for his own work, and in addition is en- 
 titled to a reasonable compensation for his initiative and 
 for the risk involved in undertaking the project — the risk 
 that the promotion might fail and his effort and money 
 be thrown away in consequence. But while frankly ac- 
 knowledging his just deserts, and while realizing that some 
 promoters are inadequately remunerated, we must also 
 recognize that many others receive grossly exorbitant com- 
 pensations, and that our existing laws, as well as commer- 
 cial conditions, make such things possible. 
 
 But whatever criticisms may be brought against the 
 practices of many promoters — and those which may justly; 
 
THE PROMOTER VJ MODERN BUSINESS 275 
 
 be brought are many and serious — it nuust not be for- 
 gotten that promotion is useful, and in truth essential to 
 industrial 2^i'<>gi'^'ss. Some, indeed, while admitting that 
 promotion is in itself a good thing, may nevertheless main- 
 tain that the promoter who simply starts an enterprise 
 and then abandons it to others as soon as he can enlist 
 their interest, is of an objectionable type; that only those 
 persons should promote who expect to maintain perma- 
 nently, or at least for some time, an active interest in the 
 concerns which they establish. There is doubtless some 
 force in this contention. Nevertheless, it is in all prob- 
 ability desirable that there should be persons who are 
 merely promoters. There are some men who have a pe- 
 culiar talent for just that sort of work, and who can best 
 benefit the community by exercising that talent. ^lore- 
 over, the great majority of men who have surplus funds 
 to invest are so engrossed in their respective vocations 
 that they have little time or effort to spare in hunting up 
 new investment opportunities. The wide-awake promoter 
 performs a real service in locating and formulating oppor- 
 tunities for them. Sound policy, therefore, does not seem 
 to lie in the direction of attempting to abolish the promoter 
 — even the mere promoter. On the contrary, what is 
 needed is a revision of our laws with the purpose of so 
 regulating the conduct of the promoter that the abuses 
 which have long been connected with his activities will 
 be restrained or abolished. 
 
THE FINANCIERING OF TRUSTS.* 
 
 BY HON. CHARLES S. FAIRCHILD. 
 
 [Formerly Secretary of the Treasury.] 
 
 The subject that I have been asked to present— "The 
 Financiering of Trusts" — is one as to which there is, prob- 
 ably, much confusion in the minds of many people. But 
 it is so simple and the process is so obviously the one that 
 must be followed that I am doubtful if I can worthily take 
 any of your time. 
 
 The motives and the processes which produce a cheese 
 factory or creamery are much the same as those which 
 produce other business combinations or so-called trusts. 
 A, B, C, D, and E own dairy farms; they become satisfied 
 in some way that they can manufacture and sell butter 
 and cheese at greater advantage if they combine both for 
 manufacture and sale than they can if they continue in 
 the old way on each individual farm. 
 
 They may reach this conclusion through the talk of 
 some man who wishes the job of managing the manufac- 
 tory or by talk among themselves. In the one case there 
 is a promoter; in the other, not. 
 
 But coming to my immediate subject, owing to the fact 
 that usually the things which we have in mind now are 
 made by the union, under a new corporation, of private 
 concerns and of corporations more or less widely separated 
 geographically, and because there are laws about corpo- 
 rations that must be complied with or evaded, some things 
 are done in their financiering which make apparent dif- 
 ferences between them and the familiar cases of which I 
 have spoken. But the difference is more apparent than 
 real, as will appear when both are well understood. 
 
 * Courtesy of the American Economic Association. 
 
 276 
 
THE FINANCIERING OF TRUSTS 277 
 
 Several iiiaiiiiracturers whose i'aclorics arc in as many 
 clifforont places come to believe that it is for their ad- 
 vantage to miite llicir vari(ms businesses: tliey consult as 
 to the value of their respective real estate, tools, machinery 
 and business connections; then they organize a corporation 
 under some state where the laws are suita])le for their pur- 
 lX)se, providing for a maximum of securities of various 
 kinds, mortgage bonds, preferred and common stock — all 
 or any of these as they may determine — and then sell their 
 properties to the new corporation, taking in pa>Tnent the 
 securities of the new^ corporation in such proportions as 
 the value of each property is to the value of all of them. 
 
 Or in another case the promoter acts. He goes to each 
 of the manufacturers, obtains an option upon their prop- 
 erties, agreeing to pay for the same; it may be in cash or 
 in the securities of the new corporation, or partly in cash 
 and partly in securities. He organizes his company and 
 agrees to sell the properties upon which he has his options 
 to the ne^v corporation for all the securities that it has 
 issued. He then distributes part of these securities to those 
 who have agreed to take them in payment for their prop- 
 erties, and sells to outsiders — new^ men — generally called 
 *'the public," another part of the new securities for cash, 
 which is used to pay the money to those manufacturers 
 who have agreed to take money in whole or in part, and 
 also an agreed part of the cash thus realized is kept in the 
 treasury of the new corporation as a working capital to 
 avoid the necessity of selling the paper of the new company, 
 as probably all of the concerns thus combined had lieen 
 obliged to do before the combination was made. This pro- 
 vision of cash for working capital is also generally made 
 in whatever way the combination be brought about; it is 
 certainly always done if good judgment and prudence have 
 been respected in the formation of the combination. In 
 many cases, I think it may be said, that one of the strong 
 inducements which have caused manufacturers to enter 
 
278 CHARLES S. FAIRCHILD 
 
 into these combinations has been that they might be freed 
 from the worry and peril of constantly raising money on 
 their business paper to carry on a business which was not 
 equipped with sufficient cash capital. 
 
 After enough of the securities have been distributed 
 and sold to fulfill the engagements of the promoter, he 
 tries to have a good supply left in his hands to reimburse 
 him for his expenses and pay him for his time and labor. 
 In some instances this pay is said to have been very large. 
 Naturally as to this I have no positive knowledge in any 
 instance, only rumor and gossip. This method of payment 
 is the same as that of the reorganizers of railroad and other 
 concerns; it is in the nature of a lawyer's contingent fee, 
 dependent upon the success of the undertaking or suit, 
 and is naturally larger than it would be if made in cash. 
 
 During the processes which I have described, under- 
 writing s}Tidicates have probably been employed to make 
 sure that a sufficient amount of securities shall be sold 
 to secure the cash needed, and there have been one or more 
 bankers who may have loaned money needed, pending the 
 final launching of the new company and may also have 
 been employed to bring out its securities, i.e., offer them 
 for subscription by the public. Syndicates and bankers 
 must be paid their commissions out of the surplus securities. 
 
 Perhaps a concrete illustration may help toward a 
 clearer understanding of just how this part of the finan- 
 ciering of these combinations is managed. Let us assume 
 that the promoter has secured options upon the plants, 
 assets and good-will of ten separate manufacturing con- 
 cerns, for which he is to pay, under the terms of his op- 
 tions, $3,000,000 in cash and $6,000,000 in preferred stock 
 and $4,000,000 in common stock of a new company of $20,- 
 000,000 capital (half preferred stock) to be foimed to ac- 
 quire the entire plants, stock and other assets, good-will, 
 etc., of the ten concerns specified, and to have when formed 
 at least $1,000,000 of working capital. As soon as these 
 
THE FINANCIERING OF TRUSTS 279 
 
 options are iu this dctiiiiti' shajx' the promoter goes to some 
 finaneial house or firm of })rivate ])aiikers for assistance in 
 raising- the ;i^4,000,000 of casli which the plan requires. He 
 presents the facts as to his options and his program and 
 proposes that if they will arrange a syndicate to under- 
 write or guarantee the purchase of $4,000,000 of preferred 
 stock and $4,000,000 common stock for $4,000,000 in cash 
 he will give them a commission of 5,000 shares of the com- 
 mon stock of the company. The bankers give the entire 
 project careful investigation, usually employing experts 
 and accountant-s to report upon the facts as to the business 
 and profits of the constituent companies. If the result 
 is satisfactory, the promoter gets a favorable answer and 
 the bankers become the managei^s of an under^vriting 
 syndicate. In carrying out this part of the program they 
 proceed to lay the matter before the individuals or com- 
 panies to whom they desire to offer an interest in the mar- 
 keting of the stock. This is naturally done by submitting 
 copies of a s^Tidicate agreement reciting that the subscrib- 
 ers agree to purchase at par the num])er of shares of pre- 
 ferred stock set opposite their respective names, receiving 
 as a bonus an equal amount of common stock — Init the 
 whole conditioned upon there being an aggregate subscrip- 
 tion equal to the $4,000,000 to be raised. If this amount 
 is oversubscribed some subscriptions are either thrown out 
 or cut down. If it is not subscri])ed the project has to be 
 abandoned or modified. In some cases the desired end is 
 sought by a public announcement of the terms on which 
 subscriptions will be received. 
 
 If the entire $4,000,000 is subscribed the next step is 
 to require the payment of the subscriptions allotted. This 
 gives the syndicate managers the $4,000,000 cash which the 
 plan requires. The new company is then incor])<)rated with 
 an authorized capital of $10,000,000 preferred and $10,000,- 
 000 common stock, of which perhaps $5,000 of the common 
 stock is paid up at once; and on this the company begins 
 
280 CHARLES S. FAIRCHILD 
 
 business witH a regular board of directors. The stock- 
 holders owning this first $5,000 of stock (50 shares) then 
 vote to authorize the increase of the capital to the amount 
 fixed in the certificate of incorporation and approve the 
 issue of all the additional stock in a block to John Doe, 
 the promoter, in exchange for the various plants, assets, 
 etc., and the $1,000,000 cash which the new company was 
 to acquire. Then by simultaneous transactions John Doe 
 gets the $10,000,000 preferred stock and $9,995,000 com- 
 mon stock; of this $6,000,000 of the preferred and $4,000,- 
 000 of the common stock are passed on to the owners of the 
 original companies; $4,000,000 of each is passed to the syn- 
 dicate, whereupon it turns over to John Doe the $4,000,000 
 of cash, which he in turn uses to pay the cash required by 
 the options and that which is to go into the treasury of 
 the new company; at the same time the titles of the various 
 properties are passed to the new company. John Doe then 
 finds himself — after turning over to the banking house 
 which formed the syndicate the 5,000 shares of common 
 stock agreed upon as commission for their services — the 
 possessor of 14,950 shares of common stock, of the par value 
 of $1,495,000. 
 
 In planning the details of the various consolidations 
 there has been great diversity. In some cases there has 
 been only a single kind of stock — common stock. Such, 
 for example, are the Standard Oil Company and the Amal- 
 gamated Copper Company — both among the largest of the 
 so-called trusts. In most cases, however, there have been 
 two kinds of stock — preferred and common — frequently ev- 
 enly divided in amount between the two. When put out to 
 the public through a syndicate, the preferred stock has usu- 
 ally been offered at par with a bonus of an equal amount, or 
 60 per cent, 75 per cent, or 80 per cent, in common stock. In 
 the terms on which the preferred stock is issued, there is 
 equal diversity. So far as one can generalize, it might per- 
 haps be said that the most general plan has been to issue a 6 
 
THE FINANCIERING OF TRUSTS 281 
 
 per cent or 7 per rent proferrod stock, pi'of erred not only 
 as to dividend named, but as to assets as well. In some 
 cases the position of the preferred stook has been made 
 exceptionally strong. Take, lor example, the preferred 
 stock of the Royal Bakini^ Powder Company which, under 
 the ])lan there followed, is allowed no voting power or rep- 
 resentation in the management so long as the quarterly div- 
 idends of 6 per cent per annum are regularly and promptly 
 paid. But if there should be a default in the payment of 
 that dividend, the entire voting power and management 
 pass from the common to the preferred stockholders. This 
 provision thus leaves the preferred stockholders in much 
 the same position as if their interest was represented by 
 ])onds— hut without the difficulty, expense and delay of 
 foreclosure in case of default in payment of interest. 
 
 In the most of the recent consolidations there has been 
 included no bonded debt. This I believe to be wise, inas- 
 much as it leaves the company with no fixed charges and 
 thus in a much stronger position in a period of depression 
 than it would occupy if it were obliged to meet the inter- 
 est on a large amount of bonds. Because of this infrequent 
 use of bonds in the consolidations which have been made 
 in the industrial field, the first long continued period of 
 depression will not produce the abundant crop of reorgan- 
 izations that has in the past attended depression in the 
 railroad field. 
 
 In the issue of common and preferred stocks in the 
 capitalization of the corporations we are considering, an 
 attempt has frequently been made to limit the preferred 
 stock to the value of the actual tangible assets turned over 
 to the new company, real estate, plants, tools, machinery, 
 stocks of goods, working capital, etc., leaving the connnon 
 stock to cover the value of the good-will, expected earn- 
 ings, expenses of promotion, etc. This brings up a ques- 
 tion which is of much importance to those wlio invest in 
 the new company's stock, viz.: ''Tn what manner has the 
 
282 CHARLES S. FAIRCHILD 
 
 value of this good-will been estimated in fixing a price 
 upon the various constituent companies?" Neariy every 
 proposition for a consolidation has been accompanied by 
 the results of a careful investigation into the net earnings 
 of the constituent companies for a number of years past. 
 These earnings, augmented, perhaps, by an estimate of 
 the economies to be effected by the consolidation of the 
 various enterprises, form the basis of the estimated net 
 earnings of the new company. Care is then taken that the 
 capital stock is not made so large that the estimated earn- 
 ings will not afford the dividend upon the preferred stock 
 and a substantial dividend upon the common stock. 
 
 In some cases the value of the good-will acquired has 
 been very carefully estimated. For example, the promot- 
 ers of one company made a sjDecial point of the conserv^a- 
 tive methods employed in arriving at the value of the good- 
 mil of the companies which were consolidated. Accord- 
 ing to their statement the new company was virtually buy- 
 ing the real estate, plants, stock, etc., on the basis of ap- 
 praised cash value. In addition an allowance was made 
 for good- will, calculated upon this basis : From the net prof- 
 its of each company deduct 7 per cent upon the capital ac- 
 tually emplo.ved, IJ per cent upon sales, which were about 
 three times the capital, 2 per cent for depreciation on brick 
 buildings, 4 per cent on frame buildings, and 8 per cent on 
 machinery; if the average net earnings were in excess of 
 all this, and in this case it appeared from the promoter's 
 statement that they usually were, the excess was capital- 
 ized as good-will on the basis of 20 per cent per annum, 
 i.e., the value of the good- will was estimated to be five times 
 the amount of such earnings in excess of 7 per cent on 
 capital and allowance for depreciation. 
 
 In some cases, however, there has not even been a pre- 
 text that the capitalization was based upon a careful inves- 
 tigation of the actual earnings of the constituent companies. 
 I have in mind a certain consolidation which it was de- 
 
THE FINANCIERING OF TRUSTS 283 
 
 sired to effect. The promoters and the brokers who at- 
 tempted to bring it out, however, in their prospeetuses 
 carefully avoided the subject of actual net earnings of the 
 constituent companies, but based the estimate of earnings 
 of the new company upon nothing more reliable than the 
 quantity of product annually turned out and an estimate 
 that the selling price had been and would be about twice 
 the cost of producing the article. It is hardly to be won- 
 dered at that the project was not sufficiently attractive 
 to enlist the necessary investment support. 
 
 Many of these large industrial coii^orations have been 
 formed to purchase, not the actual plants and assets, but 
 tlie whole or a large part of the stock of the constituent 
 companies. This stock even when the whole is owned by 
 the new corporation, is then kept alive and constitutes the 
 formal assets of the new company. 
 
 I might describe all the steps taken in the formation 
 of the corporation, were there time; but it is only what 
 is done in the foraiation of a corporation for any purpose, 
 and, while interesting, does not belong especially to this 
 subject. 
 
 I have a table of the kinds and amounts of the securi- 
 ties used by some of the more important of the 200 or 300 
 corporations of this nature that have been formed within 
 the past few years. (This table is show^n on page 285.) 
 
 All this that I have described which is in excess of 
 what is done in the formation of the cheese manufactur- 
 ing combination is rendered necessary either by the state 
 law^s governing corporations or by the need of raising cash 
 capital, or to enable the constituent membei-s of the corpo- 
 ration to conveniently collect their profits from the com- 
 bined business in proper proportions and to have a repre- 
 sentation of their interests therein which is divided in such 
 form as to enable portions of it to be sold or transmitted to 
 heirs, etc., etc. 
 
 In substance, however, there is no difference. The 
 
PM CHARLES S. FAIRCHILD 
 
 milk delivered morning and evening during the year is 
 each farmer's contribution to the combination; his inter-* 
 est in the whole varies according to both quality and quan- 
 tity of milk, just as in the other combinations the interests 
 vary according to the quality and quantity of property and 
 good-will or business contributed by each. Just as a cream- 
 ery will be successful as it is well or badly managed, or as 
 is the market for its products, so in like proportion will 
 any other business combination succeed, and for like causes. 
 The larger combinations, however, through their securi- 
 ties affect financial matters generally to a greater or less 
 extent as they come into the stock market and into the 
 field of investment and speculation. Naturally the uncer- 
 tainty as to amount and regularity of profits attendant 
 upon one of these enterprises while it is new will make 
 its securities a fruitful object of speculation. Time and 
 experience will sift them and cause each one to take its 
 proper place in the share list. All other business securi- 
 ties, be they railroad, telegraph, bank stocks or whatnot, 
 have and must go through a like sifting and settling process 
 and their values are and will be constantly changing. Some 
 of the other industrials, as they are called, have come to 
 be as regular in their dividends and as stable in price as 
 the best railroad stocks, and some of them are much more 
 removed from the speculative field. 
 
THE FINANCIERING OF TRUSTS 
 
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 •4:; 3 
 
THE RELATION OF THE FINANCIAL TRUST COM- 
 PANY TO THE INDUSTRIAL TRUST.' 
 
 BY L. WALTER SAMMIS. 
 
 [Associate Editor of the New York Sun.l 
 
 At the outset I desire, without any reservation, to em- 
 phasize my position; namely, that I deal with this topic 
 in my personal capacity, and not in any sense as represent- 
 ing any other body or bodies of men, and without in any 
 wise reflecting the views of any one else. 
 
 It is my good fortune to be a member of the editorial 
 staff of the New York Sun, but it must be distinctly im- 
 derstood that neither the substance nor the language of 
 my address has been submitted to any of my associates, 
 nor is the New York Sun in anywise responsible for my 
 statements. 
 
 It is equally important that my position shall be clearly 
 understood as to combinations of capital, commonly called 
 trusts, and also as to "trust companies," both actual and 
 nominal. 
 
 Whatever may be said in this address with reference to 
 the morale of the Shipbuilding Trust, must not be under- 
 stood as defining, or even reflecting my attitude towards 
 all combinations. I am not an anti-trust man. I do not 
 take the position that the combination movement in itself is 
 bad, or that all combinations are necessarily wrong or 
 evil-producing in their results, and it is too palpable to 
 require affiiTnation, not only that tnist companies were 
 originally fiduciary institutions, but also that many of them 
 remain so in the true sense of the word today. 
 
 Industrial combinations are not the natural result of 
 business conditions; neither are they the pure outgrowth 
 
 * Courtesy of the American Academy of Political and Social Science. 
 
 287 
 
288 L. WALTER SAMMIS 
 
 of economic principles. Trusts are made, not bom. They 
 are creatures of invention which find their origin in the 
 brain of the industrious promoter whose inventive facul- 
 ties are stimulated by the desire to possess unearned 
 wealth. "Necessity is the mother of invention," even as 
 applied to the invention of a trust, but the necessity in this 
 case is not the necessity created by economic laws, but 
 the necessit}" of the promoter. Trust companies and similar 
 institutions sometimes bear the same relation to industrial 
 combinations as manufacturers do to the product of the 
 mechanical or scientific inventor's brain. They label it, 
 give it place on the market, compensating themselves by 
 getting the largest obtainable profit for the least possible 
 risk or responsibility. 
 
 Originally trust companies were strictly fiduciary insti- 
 tutions. They partook of the character of the name 
 "Trust." They took charge of estates and managed them; 
 they were custodians of mortgages, fiscal agents for rail- 
 roads and other large combinations of capital; they attend- 
 ed to all the affairs pertaining thereto and transacted busi- 
 ness solely of a fiduciary nature. They were managed with 
 a conservatism creditable to our fathers and admired by 
 ourselves. I am not to be misunderstood as saying that 
 none of the old line trust companies are in existence. They 
 can be distinguished readily by the character of their 
 officers and the kind of business they transact. 
 
 Modern times, lax, but so-called up-to-date, methods 
 have permitted conditions different from those under which 
 the old-line companies did business. 
 
 Some of these methods would shock the ordinary out- 
 sider, but High Finance has a code all its o^^ti, fitting the 
 business processes of its adherents, elastic, pliable and 
 capable of such construction that a financier is never 
 guilty of an offense so long as there are no complaining 
 losers. In the powerful financial centers some operators 
 deny the truth of the axiom that the shortest distance 
 
FINANCIAL AND INDUSTRIAL TRUSTS 289 
 
 hotwoeii two points is a straight lino. IVratlioniatically tho 
 axiom may be time, but in High Finance the shortest dis- 
 tance between two points is the way by which the greatest 
 amount of money can be made. Regardless of the number 
 of crooks and turns that are in this line, according to a 
 certain class of High Finance ethics, it is as straight as 
 a string drawn taut. It is my purpose to point out some 
 of the ramifications in one of these so-called straight lines. 
 
 Through the protracted legal proceedings against the 
 United States Shipbuilding Company, the public has had an 
 opportunity to observe the methods by which an industrial 
 combination was actually financed. 
 
 A photograph of how it was done, rather than a thesis 
 on how it should be done, is the result. 
 
 The United States Shipbuilding Company is claimed to 
 have been incorporated under the laws of the State of New 
 Jersey by dummies furnished for the occasion on June 17, 
 1902, 'with a subscribed capital of $3,000. On July 3d 
 following, the capitalization was, on paper, increased to 
 $45,000,000 in stock and $26,000,000 of bonds. On the 
 11th and 12th of August the United States Ship])uilding 
 Company purchased the Union Iron Works, The Bath Iron 
 Works, Limited, The Hyde Windlass Company, The Cres- 
 cent Shipyard Company, The Samuel L. ]\roore & Sons 
 Company, The Eastern Shipbuilding Company, The Harlan 
 & Hollingsworth Company, The Cauda Manufacturing 
 Company and the capital stock of the Bethlehem Steel 
 Company, paying for them $6,000,000 in cash, $14,050,000 
 of bonds and $28,000,000 of stock. The entire amount of 
 securities disposed of to acquire these companies and to 
 provide $15,000,000 working capital and to pay the profits 
 of the various persons and institutions conceraed in the 
 promotion amounted, at par value, to $69,500,000. For this 
 bouquet of fortunes the combination received, besides the 
 reputed cash working capital of $1,500,000, constituent 
 companies which, omitting the Bethlehem Steel Company, 
 
290 L. WALTER SAMMIS 
 
 were valued later by competent men at $12,441,518.26. 
 The Mercantile Trust Company was custodian of a first 
 mortgage on the plants for $16,000,000 and the New York 
 Security and Trust Company was custodian of a collateral 
 mortgage of $10,000,000 on the capital stock of the Bethle- 
 hem Steel Company, which was, besides, a second mortgage 
 on the Shipbuilding plants. It will be observed that the 
 first financial institution having relations with the United 
 States Shipbuilding Company was the Mercantile Trust 
 Company, the attorneys of which were Messrs. Alexander 
 & Green. 
 
 The Trust Company of the Republic was then asked to 
 become banker for the issue of the bonds, and it, with the 
 Mercantile Trust Company, played important parts in the 
 undertaking. The Trust Company of the Republic, through 
 its president, advanced large sums of mone}^, much of 
 which was obtained by borrowing on Shipbuilding securi- 
 ties countersigned by the Mercantile Trust Company as 
 registrar. When the crash came the Trust Company of 
 the Republic was able to figure up a cash loss of $982,334. 
 
 With the fall of the United States Shipbuilding Com- 
 pany my story has nothing to do. My theme is the methods 
 by which it was established, false and insecure as that es- 
 tablishment was, and my story must end at the point where 
 it was left to stand alone, fpr at that point it reached its 
 climax. 
 
 To a full understanding of the matter, it is necessary 
 to take up the tale at the beginning. 
 
 John W. Young, Avhose father, Brigham Young, sue- 
 ceeded Joseph Smith as the head of the Mormon Church, 
 arrived in New York in the closing year of the nineteenth 
 century with a theory. He was a promoter who had not 
 met unvarj^ing success in his many previous ventures, but, 
 like all promoters from Col. Sellers down, he possessed the 
 faculty of dreaming dreams and telling them so convinc- 
 ingly that they lost their element of unreality and took 
 
FINANCIAL AND INDUSTRIAL TRUSTS 291 
 
 upon themselves the seml)kince of established facts in the 
 niiuds of his listeners. Young had the idea that it would 
 be a good stroke of business to combine the leading ship- 
 building industries of the country into one gigantic corpo- 
 ration, and had worked out a theory by which it could be 
 done with much profit to the promoters. 
 
 Young's idea was good, but his method, which he made 
 inseparable from his idea, was bad. But it was spangled 
 with prospective coins, glittering with possibilities and 
 laden with immense prospective fortunes. After many 
 futile attempts, he succeeded in finding a group of men who 
 were willing to listen while he ex^oloited his idea and 
 expounded his theory. These men accepted his theory, and 
 adopted his method, and, using it as a base, constructed 
 thereon a situation which they called a trust, and which 
 was incorporated under the name of the United States 
 Shipbuilding Company. The theory was impossible; the 
 situation was untenable; the trust, as it was manufactured, 
 was impracticable, and the United States Shipbuilding 
 Company was insolvent. 
 
 The financial world was absorbed at that time in creat- 
 ing industrial combinations, some of which were either 
 actually bankrupt or were on the verge of bankruptcy; in- 
 flating values and watering stocks; successfully offering 
 new securities to a public riotously eager to buy them, and 
 finally dividing with promoters and vendors, profits which, 
 even in that era of inflation, were considered enormous. 
 Young knew that his plan was richer in paper profits than 
 any that had been brought to a successful issue, with the 
 possible exception of one, and that it had large fortunes 
 to scatter among the men who might assist him to develop 
 it into an accomplished fact, so far as obtaining the money 
 of the investor and the speculator for elegantly litho- 
 graphed pieces of paper was concerned. He talked of it 
 and wrote it on pai:)er; he had it printed in the terms best 
 api^reciated by financial chieftains — a dollar mark and 
 
292 L. WALTER SAMMIS 
 
 seven or eight figures on the left hand side of the decimal 
 point. But he got no real start until he met Le\Yis Nixon. 
 
 Mr. Nixon had been a constructor in the United States 
 Navy, but had resigned from the service to engage with 
 the Cramps. As a naval constructor he designed the 
 Oregon, the Indiana and the Massachusetts and these ves- 
 sels established his reputation as one of the ablest ship- 
 builders in the world. Before he met Young he purchased 
 the Crescent Shipyards at Elizabethport, N. J., for about 
 $7,000, organized a company, capitalized for $1,120,000, re- 
 taining in his o^Ti name all the stock except so much as 
 was required to qualify directors. Young interested Nixon 
 by showing him an option for the purchase of the Newport 
 News Shipbuilding and Dry Dock Company, and Nixon 
 gave him an option on his own plant and agreed to work 
 with him in forming the proposed combination. This was 
 the start. Young now had two options and the name and 
 reputation of the greatest shipbuilder of the United States 
 to work with. 
 
 He had the co-operation of Col. John J. McCook, a 
 director in the Mercantile Tnist Company and as well an 
 active partner of the law firm of Alexander & Green, coun- 
 sel for the Mercantile Trust Company, counsel for John 
 W. Young, counsel for the United States Shipbuilding 
 Company, and acting from time to time as counsel for 
 Nixon and Dresser as the Shipbuilding Syndicate. Col. 
 McCook, as he has told me, became intensely interested 
 in the proposed combination and did all he could to ac- 
 complish it. Young occupied a room adjacent to the offices 
 of Alexander & Green, and Col. McCook and he appear 
 to have worked in unison. Options on other shipbuilding 
 companies were obtained and the plan was submitted to 
 the banking house of H. W. Poor & Co., on Wall Street, 
 which finally consented to become banker for an issue of 
 bonds and a prospectus was issued. The companies which 
 were then to be included in the deal were substantially the 
 
FINANCIAL AND INDUSTRIAL TRUSTS 293 
 
 same as those which finally entered it. Tlic prospectus was 
 ready for issue on May 7, 1901, but on this day occuiTed 
 what is kno\\Ti as the Northern Pacific panic, and the 
 pamphlets were not distri])uted. Some say this was because 
 of the panic; others that it was because no satisfactory 
 report could be obtained of the annual earnings of the con- 
 stituent companies. WliatcA-er the reason, the project fell 
 flat and Poor & Co. did not attempt to revive it. The pro- 
 moters had all their work to do over again. For nearly a 
 year they seem to have tried unsuccessfully to get other 
 financial houses to assume the undertaking. ^Meanwhile, 
 they succeeded in renewing some of their options. 
 
 bn the 31st of March, 1902, the Trust Company of the 
 Republic opened its doors for business at 346 Broadway. 
 Its capital was $1,000,000, and its surplus $500,000. The 
 Tnist Company of the Republic proposed to deal with cot- 
 ton growers in the South who are accustomed to borrowing 
 money at New York legal rate of interest plus a bonus. It 
 intended to lend money to the cotton people against crops 
 stored in warehouses, at the legal rate of interest and 
 without bonus, and to borrow money in the North against 
 these crops and on other securities which it should accumu- 
 late. The opportunities for a large and lucrative business 
 were bright and allui'ing. The new trust company had 
 among its organizers and directors men whose names stood 
 and today stand for strength and probity in the world of 
 finance. Alexander Creig, President of the Security Ware- 
 house Company of New York, with whose institution the 
 new-bom trust company immediately formed an affilia- 
 tion, was one of the organizers. 
 
 As the head of this concern whose future seemed to 
 promise so much, the directors selected Daniel LeRoy 
 Dresser. Mr. Dresser was a merchant. He had been the 
 President of the ^lerchants' Association of New York and 
 had filled the position not incompetently, but his experience 
 in the financial world was almost nil. However, he had 
 
294 L. WALTER SAMMIS 
 
 valuable financial connections. By means of these connec- 
 tions lie may have been expected to bring a large volume of 
 business to the Trust Company of the Eepublic. It may be 
 that Mr. Dresser was competent to handle the ordinary 
 business of the Trust Company— indeed, no word of blame 
 has ever been spoken of his management of the regular 
 business— but when he entered into the industry of trust 
 manufacturing, he succeeded only in inviting ruin both to 
 his company and himself. He was bold with the boldness of 
 ignorance, incautious in his dealings with other financial in- 
 stitutions and unable to deduce from the experience of 
 others the natural outcome of his exceeding erratic meth- 
 ods and his inept handling of weighty matters. 
 
 The personal affairs of Mr. Dresser, however, are not 
 within the scope of this paper, except so far as they indi- 
 cate a lack of experience in the man who, above all others, 
 except the actual deus ex machina, was responsible for the 
 flotation of the United States Shipbuilding Company and 
 the methods by which it was accomplished. It is fair to say 
 that none except a tyro would have undertaken to finance 
 matters of such vast importance by the methods he adopted, 
 and that a man of wider experience and a larger measure 
 of forethought would have dropped the whole thing before 
 the borrowing period arrived, and would, indeed, have 
 thrown it overboard upon the first indication that the entire 
 burden of responsibility was to be placed upon his 
 shoulders. 
 
 Nevertheless, here was a new trust company, anxious 
 for business, with a man inexperienced in financial affairs 
 at its head. In the same city were an eager promoter and 
 a firm of lawyers, allied to a large trust company with 
 powerful affiliations, who had for a long time used every 
 effort to obtain the support of a financial institution in their 
 joint project without success. Such a combination has its 
 possibilities. They were sufficiently attractive for Mr. 
 Young, the promoter, to seek an interview with Mr. Dresser. 
 
FINANCIAL AND INDUSTRIAL TRUSTS 295 
 
 He succeeded, Init not until it had been made apparent to 
 ^Ir. Dresser that Col. John J. ^IcCook was associated with 
 him, as counsel or otherwise, in the plnii wliidi lie liad to 
 propose. The promoter did not at first broach the subject 
 of the United States Shipl)uildin,2: Company. ^Ir. Dresser 
 was told of a syndicate of Frencli ])ankers who desired to 
 trade in American industrial securities and do their trading 
 on this side of the Atlantic so that they might avoid the tax 
 to which such transactions are subject when accomplished 
 within the jurisdiction of the laws of France. There is 
 evidence that it was represented to ^Ir. Dresser that the 
 syndicate had been fomied and was waiting only to make 
 a connection with a responsible and reputable house in 
 the United States. Profits derived from business which 
 they should transact together were to be divided equally. 
 
 This seemed to Mr. Dresser to be an excellent opportu- 
 nity for the Trust Company of the Republic, especially since 
 the capital of the French institution was represented to be 
 20,000,000 francs, and before the former was a month old 
 the preliminary arrangements for a working agreement had 
 been completed and in writing. Before the binding agree- 
 ments were attempted, the matter of the French banking 
 house, of the existence of which no proof has ever been ad- 
 duced, was dropped, and the plan for forming a shipbuild- 
 ing combination was substituted. Exactly how this was 
 accomplished it is almost impossible to deteimine. The 
 truth is difficult to ascertain when the statements of the 
 individuals most interested vary so widely. As a matter of 
 fact, though, while negotiations concerning the French 
 banking house were still uncompleted, Young sailed for 
 Paris, leaving his affairs in the hands of his lawyers. This 
 was on April 22d. At this time, according to the statements 
 of both Col. ^IcCook and Mr. Dresser, made to me person- 
 ally, the Trust Company of the Republic still thought it was 
 to co-operate with a French S}Tidicate in the purchase and 
 sale of American securities. 
 
296 L. WALTER SAMMIS 
 
 Mr. Young was absent on this trip to Paris about three 
 weeks, leaving New York about April 22d. He returned 
 to America about May 15th. During his brief stay in this 
 country, before he took his second trip to Paris, copies of a 
 prospectus for the consolidation of the shipbuilding plants 
 under the name of the United States Shipbuilding Com- 
 pany appeared, without the name of any trust company 
 as the banker, but with that of the Mercantile Trust Com- 
 pany as trustee of the mortgage and transfer agent of the 
 stocks, and Alexander & Green as counsel. 
 
 Mr. Dresser was asked to take up the matter of ex- 
 ploiting the United States Shipbuilding Company. A mem- 
 orandum was shown to him, setting forth the profits which 
 were to be derived from the successful perfonnance of this 
 work. Dresser agreed that the Trust Company of the 
 Republic should act as banker, their name Avas inserted in 
 the blank space left for this purpose and the prospectus 
 was ''confidentially" issued. 
 
 The original proposition was to issue $16,000,000 of 
 bonds and $20,000,000 of stock, divided equally into com- 
 mon and preferred shares. This was before the Bethlehem 
 Steel Company was considered. 
 
 A digest of the memorandum shows that it was pro- 
 posed to dispose of $9,000,000 of bonds, $2,500,000 of pre- 
 ferred stock and $2,500,000 of common stock in order to 
 realize $8,100,000 in cash. Of the cash and securities then 
 remaining and in hand $6,400,000 in cash, $4,050,000 of 
 bonds, $4,000,000 of preferred stock and $4,050,000 of com- 
 mon stock were to be paid to the 0A\Tiers of the properties 
 to be acquired, leaving $1,700,000 cash, $2,950,000 in bonds, 
 $3,750,000 of preferred stock and $2,750,000 in common 
 stock. Of this $1,500,000 in cash and $1,500,000 of bonds 
 were to be retained in the treasury of the proposed com- 
 bination for working capital. This left $200,000 cash, 
 $500,000 bonds, $3,750,000 preferred stock and $3,750,000 
 common stock — a grand total of $9,150,000, figuring the se- 
 
FINANCIAL AND INDUSTRIAL TRUSTS 297 
 
 ciiritios at par value— to ^o to the promoters. From it they 
 Avere to defray the expenses of promotion. Before tlie con- 
 stituent properties were purchased however, $400,000 cash 
 was added to this profit by reducing the ag.c^re^^ate price to 
 be paid for constituent companies to $6,000,000. Tlie 
 underwritiui;- contract was with, and ran to, the Mercantile 
 Trust Company. 
 
 The Trust Company of the Republic was asked to obtain 
 $3,000,000 uiulorwriting in the United States and the Mer- 
 cantile Trust Company and Alexander & Green undertook 
 to obtain $3,000,000 in Paris and $3,000,000 in London. In 
 a letter written to the Trust Company of the Republic later 
 John W. Young promised that its compensation should be 
 $67,000 in cash, $250,000 in bonds, $700,000 in preference 
 shares and $700,000 in common shares. This was large 
 bait, and it was swallowed, hook, line and sinker. 
 
 From this time on Mr. Dresser, acting for himself and 
 for his company, worked with Lewis Nixon in assisting the 
 combination. ^Mien Young sailed for Paris he left his 
 options, which were made to Lewis Nixon as trustee, and 
 gave Mr. Nixon power of attorney over them. Young left 
 also a tender of the companies on which he held options. 
 Tlie Trust Company of the Republic desired some further 
 tufonnation than was contained in the prospectus, and there 
 was sent to Mr. Dresser one W. T. Simpson, the accountant 
 upon whose figures the prospectus was based. The ac- 
 countant apparently succeeded in showing ^Ir. Dresser and 
 his advisers that the companies to be taken in were in 
 good condition and that to combine them was desirable. 
 The Tnist Company of the Republic then took up the favor- 
 able consideration of the tender of the companies which 
 were to fonn the trust. 
 
 By the tenns of the underwriting agreement, the $9,000,- 
 000 of bonds were to be underwritten at 90, and each under- 
 writer was to receive as a bonus 25 per cent of his under- 
 writing in each kind of stock. A public offering was to be 
 
298 L. WALTER SAMMIS 
 
 made of the underwritten bonds at 97/4, and the difference 
 between this and the underwriting price was to be shared 
 pro rata among the miderwriters, less expenses of adver- 
 tising, etc. 
 
 Just at this time the agitation for a subsidy on Ameri- 
 can-built ships had reached its height and the measure be- 
 fore Congress seemed certain to succeed. English com- 
 panies were casting something more than longing eyes in 
 the direction of our ship3^ards in consequence, and were 
 making substantial efforts to form such a combination as 
 Young proposed. On the surface, with two-thirds of the 
 bonds to be underwritten abroad, the plan seemed certain 
 of success — and the profits to accrue to the principals in the 
 undertaking were most enticing. The Trust Company of 
 the Republic agreed to undertake that portion of the labor 
 assigned to it and obtain $3,000,000 of underwriting. It 
 did this the more willingly since word had been received 
 from Young in Paris, that he was succeeding and that the 
 underwriting allotted to the French capital w^ould be com- 
 pleted in a few days. 
 
 The investing and speculating public had, seemingly, 
 recovered tone and was at least supposed to be ready to 
 again absorb securities of industrial combinations. It was 
 not apparent at that time that the market was in the condi- 
 tion so excellently described by the most successful reor- 
 ganizer the country, perhaps the world, has ever seen — 
 glutted with undigested securities. Promoters and under- 
 writers alike prophesied an easy sale of the bonds and a cor- 
 respondingly easy reaping of profits. 
 
 The Trust Company of the Eepublic performed its 
 share of the labor without difficulty, for the prospect of a 
 large bonus of stock without the investment of a dollar ap- 
 peals to underwriters. Indeed, so good did the proposi- 
 tion seem that $320,000 of bonds were paid for by the 
 underwriters and withdra^vn from the public offering, and 
 $2,500,000 were represented to have been sold abroad. 
 
FINANCIAL AND INDUSTRIAL TRUSTS 299 
 
 When Yoinio: wont to Paris, ostensibly perhaps, to at- 
 tend to the matter of the Freneh bank, })ut to obtain nnrler- 
 writin^ for the Shipbuilding Company, lie found no diffi- 
 culty in accomplishing his purpose so far as oV)taining 
 names was concerned, lie had been in Paris before on 
 promotion enterprises and had among his ac(iuaintances a 
 certain Baron P. Calvet-Rogniat. Him he enlisted in the 
 undertaking, and when he returned to New York in the 
 middle of May he brought a written contract in which the 
 Baron agreed to obtain $3,500,000 of underwriting in 
 France. 
 
 Rogniat's undertaking was as follows: 
 
 Paris, May 7, 1902 
 John \V. Young-, Esq., 
 Dear Sir: 
 
 In consideration of the premises I for myself and as the representative of 
 a group of financiers headed by Mr. Victor Schrcyer, hereby undertake and 
 agree to obtain the signatures of said group of substantial underwriters (who 
 are good and who have agreed to underwrite the same) to the underwriting 
 letter of the United States Shipbuilding Company, a copy of which is hereto 
 attached, dated April 19, 1902, to the full amount of three million five hun- 
 dred thousond dollars of the bonds of said company on or before May 21st 
 properly verified, the same to be cabled to Messrs, Alexander & Green, 120 
 Broadway. >s'ew York City, on or before that date. 
 
 I also undertake and agree to procure either the withdrawal of said bonds 
 under the terms of said underwriting letter, or the public issue of said bonds 
 under the terms of said letter through either the Franco-Swiss Bank of Paris 
 or other equally substantial bank, simultaneously with the public issue of the 
 said company's bonds in America, it being understood in accordance ^yith 
 clause one of said underwriting letter that this agreement shall not be bind- 
 ing upon the undersigned unless the entire amount of 9,000,000 of bonds shall 
 have been underwritten. 
 
 Yours truly. 
 
 P. CALVET-ROGXIAT. 
 
 Rogniat appears to have obtained this underwriting 
 and more. It was easy for him to do this because what 
 seemed to be required was a list of names signed to the 
 underwriting agreement. The element of responsibility 
 does not seem to have been so closely inquired into. 
 
 Representations were made to prospective underwriters 
 there that the American public was simply wild with desire 
 to buy the securities of industrial combinations, and that all 
 that was necessan^ was a list of names with amounts set 
 opposite to each which should aggregate $3,000,000; that 
 
300 L. WALTER SAMMIS 
 
 the securities would find a ready market here, and that the 
 issue of $9,000,000 would be oversubscribed. This, it was 
 explained, would leave the underwriters in the enviable 
 position of taking profits without investing a single franc. 
 This is usually, of course, the ideal of an underwriter, but 
 it is customary, even in Wall Street, for an underwriter to 
 be able to meet his obligation. 
 
 So far as can be ascertained few substantial Parisians 
 placed their names on the agreement. Strenuous efforts 
 which were made later to compel these underwriters to pay 
 their obligations failed absolutely, except that the Baron 
 Eogniat did contribute $25,000, for the recovery of which 
 amount he has brought suit against the Mercantile Trust 
 Company. A total of $4,250,000 was underwritten in this 
 manner in the French capital and a list of the names 
 obtained was forwarded. 
 
 Mr. Dresser was advised that because of the coronation 
 preparations which were being made in London it had been 
 found impossible to conclude arrangements for obtaining 
 the $3,000,000 of underwriting which had been guaranteed 
 from the English capital. Mr. Dresser was asked if he 
 would undertake to obtain here an additional $1,750,000. 
 The list sent by Rogniat indicated that Paris would take 
 $4,250,000, which left only $1,750,000 of the foreign under- 
 writing to be secured. Mr. Dresser agreed to perform 
 this extra work. The burden was being shifted gradually 
 to the shoulders of the Trust Company of the Republic. 
 A more experienced man would at this point have obtained 
 this or washed his hands of the entire matter. A more 
 astute man would have taken alarm at the too evident un- 
 willingness of the other trust company to publicly assume 
 the responsibility. The proposition to assign the under- 
 writing to the Trust Company of the Republic was signif- 
 icant. 
 
 Under these conditions the bonds of the United States 
 Shipbuilding Company were offered to the public on June 
 
FINANCIAL AND INDUSTRIAL TRUSTS 301 
 
 11, 1902. Oil tliat (late a ])r(»sportvis was jjiihlislicd in tlic 
 piil)Ii(' })rint which stated what was not true. The question 
 whether this prospectus was authorized by the Trust Com- 
 pany of the Republic or by the Mercantile Trust Company 
 or by both is before the courts. 
 
 The prospectus stated, among other things, that the 
 United States Shipbuilding Company had been organized 
 under the laws of the State of New Jersey, and mentioned 
 as directors a nimiber of responsible men. It goes with- 
 out saying that these gentlemen were not directors, be- 
 cause the company had not yet been fully organized. Some 
 of them say that they were not consulted about the use of 
 their names, and only four of them ever served as directors 
 when the company was organized some months later. The 
 prospectus went on to say that Alexander & Green, counsel 
 for the new company, certified as to the validity of the or- 
 ganization and of the securities issued and the title of the 
 company to the property acquired. It stated that the 
 plants were eaniing $2,250,000 a year and had abundant 
 facilities for additional work and increased earnings. On 
 June 18 the books were opened for subscriptions in 12 
 cities in this country and in Paris, and the fishermen sat 
 back and waited for the public to take the bait. 
 
 The response was not only discouraging; it should 
 have been fa^al. The public sent subscriptions for only 
 $490,000 of the bonds. This was again a period where the 
 Trust Company of the Republic should have thrown the 
 undertaking overboard and charged the expense it had 
 incurred to profit and loss. The public did not rise to it, 
 the underwriters did not want it or they would have taken 
 their bonds before they were offered at public sale, and 
 the whole thing was flattening out. 
 
 Tlie promoters turned to Bethlehem (not in the scrip- 
 tural sense) for salvation.^ 
 
 On June 12, 13 and 14, 1902, :\rr. Dresser and Mr. 
 Nixon discussed with Charles M. Schwab, President of the 
 
302 L. WALTER SAMMIS 
 
 United States Steel Corporation, the advisability of acquir- 
 ing the Bethlehem Steel Company for the Shipbuilding 
 Company, and submitted to him financial statements of the 
 Shipbuilding plants, their resources, liabilities and earn- 
 ings. The Bethlehem Steel Company was prosperous and 
 remuneratiye and, besides, would place the United States 
 Sliipbuilding Company, if acquired by the combination, in 
 the enviable position of being able to build armored vessels 
 and thus compete for government work. 
 
 Some idea of the value and importance of this company 
 can be learned from the earning capacity of the property. 
 At the time of its transfer to the Shipbuilding Company, 
 it was earning at the rate of $1,500,000 a year, and is now 
 earning, I am infomied, at the rate of $3,000,000 a year. 
 The interest charges on the underlying bonds make the 
 only fixed charges of $557,500, which would leave sub- 
 stantially, at the present rate of earning, for distribution 
 upon the securities issued on account of that property 5 
 per cent on the $10,000,000 of bonds, 6 per cent on the 
 $10,000,000 of preferred stock and 14 per cent on the $10,- 
 000,000 of common stock. 
 
 Mr. Schwab asked for the Bethlehem Steel Company 
 $9,000,000 in cash, besides a certain amount of securities. 
 The cash was, of course, out of the question. The promot- 
 ers had peddled all the securities for which they could find 
 a market and did not see their way clear to sell outright 
 bonds against the Bethlehem Steel Company, which was the 
 only way in which they could raise money to pay the 
 demand of Mr. Schwab. They projDosed therefore to pay 
 for the Bethlehem Steel Company with securities issued 
 against that plant itself. Mr. Schwab told them that Mr. 
 J. P. Morgan, who was then in Europe, would have to be 
 consulted, because J. P. Morgan & Company, as managers 
 of another syndicate, held the stock of the Bethlehem Com- 
 pany, and were entitled to participation in any profit real- 
 ized from such a sale. Mr. Morgan was communicated with 
 
FINANCIAL AND INDUSTRIAL TRUSTS 303 
 
 by cable and an answer was rocoivod. In the aftcnioon of 
 Juno 14, 1902, iMr. Nixon and Mr. Dresser closed the nego- 
 tiations for taking the Bethlehem Steel Company. 
 
 Nixon and Dresser agreed that Mr. Schwab sliould re- 
 ceive $10,000,000 collateral mortgage bonds and $10,000,- 
 000 of each kind of stock, .t:^0,000,000 in all at par, for the 
 capital stock of the Bethlehem Steel Company. Later, the 
 common stock was increased by an additional $5,000,000, 
 which, it seems, w^as to be used for promotion purposes. By 
 this method it was proposed to increase the capitalization of 
 the company, advertised as $20,000,000 with $16,000,000 
 bonded indebtedness, to $45,000,000 stock and $26,000,000 
 bonded indebtedness. 
 
 After the negotiations for the Bethlehem property were 
 concluded, Mr. Schwab called in his counsel, jMr. Max 
 Pam, to prepare the necessary contracts. This was Mr. 
 Pam's first connection with the matter. 
 
 On June 17, three days after the prospectus w\as pub- 
 lished, the United States Shipbuilding Company was in- 
 corporated in New Jersey by an officer and two employes 
 of the Corporation Trust Company for $3,000. These men 
 acted as directors also, taking their instructions from the 
 promoters. In July the capital of the company was in- 
 creased to the amount I have already mentioned, a dummy 
 board of directors having been furnished for tliis purpose. 
 
 On July 2, Mr. Nixon and Mr. Dresser went to ^Ir. 
 Schwab's office to sign the formal agreement under which 
 they were to take over the Bethlehem Steel Company. They 
 contracted to pay to J. P. Morgan & Company, as syndicate 
 managers, $7,246,871.48 in cash and $2,500,000 of each kind 
 of stock of the Shijobuilding Company for the 299,910 shares 
 of the Bethlehem Company which were held by J. P. ^[or- 
 gan & Comjoany as syndicate managers. This was the en- 
 tire issue of Bethlehem stock, with the exception of ninety 
 shares. The par value of each share was $50. In order to 
 get the money with which to pay J. P. Morgan & Company 
 
304 L. WALTER SAMMIS 
 
 Mr. Nixon and Mr. Dresser signed with Mr. Schwab an 
 agreement which assured to them this cash requirement. 
 Under this agreement Mr. Schwab contracted to furnish 
 the cash necessarj^ to acquire the stock of the Bethlehem 
 Steel Company and to accept in return $10,000,000, par 
 value, 5 per cent, twenty year collateral gold bonds, and 
 $7,500,000 of each kind of stock of the United States Ship- 
 building Company. The mortgage on which the bonds 
 were to be issued was to be a second mortgage lien upon 
 the properties of the Shipbuilding Company and to have 
 a voting power equal to the same amount of stock, although 
 the first mortgage on the constituent companies was not 
 to cover the Bethlehem Steel Company. The shares of 
 the Bethlehem Steel Company, acquired thus with Mr. 
 Schwab's money, were to be deposited mth the New York 
 Security and Trust Company as security for the mortgage; 
 the Shipbuilding Company was required to guarantee a 
 dividend of 6 per cent on the capital stock of the Bethle- 
 hem Company, to provide the Bethlehem Company with 
 work sufficient to earn this dividend, or to advance the 
 money therefor, and to see that the Bethlehem Company 
 should always have the $4,000,000 working capital which 
 it then claimed to have. 
 
 It was also agreed that the holders of the collateral 
 bonds in the absence of any default should elect a full 
 minority of directors of the Bethlehem Steel Company. 
 The form and provisions of the bonds to be issued under 
 this agreement were to be satisfactory to Mr. Schwab and 
 his counsel, and the deal was not to be concluded until 
 the other constituent companies had been duly acquired 
 and paid for. 
 
 Mr. Schwab and Mr. Pam have been criticised severely 
 for making the terms of this contract stringent. I asked 
 Mr. Pam recently why Messrs. Nixon and Dresser agreed 
 to the terms of that contract, and he replied that the terms 
 of the contract were not unreasonable, that they were 
 
FINANCIAL AND INDUSTRIAL TRUSTS 305 
 
 intondod to protect Mr. Schwab against any untoward 
 coutin«;encics; that the agreement was submitted by 
 Messi-s. Nixon and Dresser to their counsel and was fully 
 discussed and passed by him before lacing signed l)y them; 
 that the tenns of the agreement were assented to and the 
 contract signed after conference and negotiation between 
 himself and Messers. Nixon and Dresser and Messrs. 
 Alexander & Green, who, in this matter, at least, w^ere 
 acting as Nixon and Dresser's counsel. 
 
 Mr. Alexander, while abroad, had gone to Paris to see if 
 any money could be collected from the underwriters there. 
 He found them averse to paying anything. In the first 
 place, they said, they had been induced to underwrite by 
 being told that payment would never be expected; in the 
 second place, after the pitiful failure of the public offer- 
 ing, a cable was sent to Paris saying that the public issue 
 was a success. This the Paris underwriters interpreted 
 as meaning that the entire $9,000,000 of bonds had been 
 taken by the public and that nothing remained for them 
 to do except to take their profit. They refused to accept 
 Mr. Alexander's explanation that it was the custom in 
 this country to call an issue a success, no matter how badly 
 it had failed, and to peddle the bonds afterwards. The 
 best Mr. Alexander was able to accomplish was to get the 
 Frenchmen to give their notes for the amounts they had 
 underwritten. These notes were to mature on October 6. 
 That the French underwriting was nil was not, however, 
 admitted by the contracting parties. It was still carried 
 as a good asset and counted in as part of the underwriting. 
 
 Nevertheless, IMr. Alexander seems to have sent written 
 and cabled assurances of the bona fides of the French 
 underwi-iting. His opinion seemed to be that it would be 
 paid and that it was delayed only on account of details. 
 He represented liimself to the Paris lianking community as 
 counsel for the Mercantile Trust Company in this matter 
 and instmcted them about the transfer of funds to New 
 
 B— II— 20 
 
806 L. WALTER SAMMIS 
 
 York when payments should be made, and also in regard 
 to other details of the transaction, as their counsel. Assur- 
 ances were received from Paris, and from time to time 
 reiterated, that the money from the French underwriters 
 w^ould be forthcoming. 
 
 On the 23d day of July, 1902, by cable, the French un- 
 derwriting was called. 
 
 The calls were made by cable to avoid legal complica- 
 tions under French laws. The following cable atfords an 
 example of all: 
 
 "July 23, 1902. 
 "Odero, 
 
 C/o Panta (the cable address for Rogniat), Paris. _ 
 
 Have allotted you $8,000 bonds of the Shipbuilding underwriting. Pay 
 Morgan & Harjes twenty-five per cent on allotment July twenty-fifth. Upon 
 payment we will issue negotiable receipt in New York to your order. 
 
 MERCANTILE TRUST CO." 
 
 The American underwriters had responded promptly to 
 the call, and an inquiry from New York as to why Paris 
 did not pay brought the following: 
 
 "Paris, July 25th, 1902. 
 "McCook, N. Y. . 
 
 All I hear indicates general response. Short notice creates slight delay. 
 Appreciate money must be in New York before August. Underwriters con- 
 template simultaneous payment. Have payments been made New York. 
 
 (Signed) Beatty." 
 
 (McCook was the cable address for Alexander & Green, and Beatty was 
 the cable address of C. B. Alexander.) 
 
 On the 5th of August, 1902, matters were approaching 
 a crisis and the following was sent: 
 
 "New York, August 5, 1902. 
 "Oppenheim, Young and Mayer, 
 C/o Trebor, Paris. 
 Can you not give us an exact statement of the present conditions of pay- 
 ments by underwriters each for twenty-five per cent due July twenty-fifth and 
 August first respectively, and when cash remittances will be actually paid. We 
 must know on account of commitments here, and so far have nothing ex- 
 cept promises. Where is the hitch and why the continued delay after every- 
 thing so far as we can gather from your cables, is settled. 
 
 Republicus McCook Nixon." 
 
 Finally, on the 7th, the following cable was sent 
 to Yoimg: 
 
 "New York, August 7, 1902. 
 "Young, 
 
 C/o Trebor, Paris. 
 We are getting tired of promises to pay tomorrow. We must rnake our 
 payments here and must have French money to do it with. Republicus," 
 
FINANCIAL AND INDUSTRIAL TRUSTS 307 
 
 The following cables further explain the situation: 
 
 "New York, AuRUst 8, 1902. 
 "Calvct Ro).jniat, 
 
 C/o Trchor, Paris. 
 Monday last day for closing Bethlehem. All other plants must be paid 
 for before closinR this transaction. It is absolutely essential to have your 
 money in New York Saturday. Republicus." 
 
 "New York, AuKust 11, 1902. 
 "Calvet Ropniat. 
 
 C/o Trebor, Paris. 
 No payments received to-day from French underwriters. Please cable 
 immediately when money is to be in New York. 
 
 Republicus." 
 
 "Paris, August 12, 1902. 
 "Republicus, N. Y. 
 
 Rogniats Russian returns delayed yesterday; learn part arrived; he and 
 
 others pay today; Schreyer and all seem now ready to pay. Know nothing 
 of second call. Have wired Alexander to come here. 
 
 Our persuasion and his iron hand in velvet glove of course will bring 
 desired results. Young." 
 
 And finally we have this significant suggestion by cable; 
 
 "St. Moritz, August 13, 1902, 
 "McCook, (Alexander & Green, N. Y.) 
 
 Suggest Mercantile assign to Shipbuilding Company call, who can sue or 
 to Republicus with consent of Shipbuilding Co. Alexander." 
 
 As late as September 8th the theory was still current 
 that there would be results from the French underwnting. 
 
 About the 6th of October, 1902, Mr. Dresser arrived at 
 Paris and within a few days after his arrival cabled to the 
 Trust Company of the Republic that the French under- 
 writing was valueless. ]\Ir. Dresser's opinion of the French 
 underwriting was expressed in much stronger language 
 than this. 
 
 The relation of the ^lercantile Trust Company of New 
 York must not be overlooked in this transaction. It was 
 the party of the fii"st part to the underwriting agreements, 
 and the trustee of the bond issue. It was, as I have already 
 stated, the first financial institution having announced pub- 
 lic relations with the Shipbuilding undertaking. 
 
 Tlie prospectus showed that there w(nild be an issue 
 of $16,000,000 of bonds secured by a first mortgage upon 
 the Shipbuilding Company's plants, of which bonds and 
 mortgage the Mercantile Trust Companj^ acted as trustee, 
 
308 L. WALTER SAMMIS 
 
 and the bonds were not valid and were not subject to issue 
 or use until each bond was properly certified by the trus- 
 tee, and were issuable only on its counter signature as 
 trustee. 
 
 On June 24, 1902, John W. Young undertook to trans- 
 fer and sell to the Shipbuilding Company these various 
 shipbuilding and other properties, with a certain amount 
 of cash, and his payment was to come from the issue of 
 $16,000,000 of first mortgage bonds, of which $1,500,000 
 were to remain in the treasury. 
 
 The Shipbuilding Company did not acquire title to the 
 shipbuilding plants until the 11th of August, and up to 
 that time no bonds were apparently deliverable on any 
 account whatever. Any issue of the bonds prior to that 
 time seems strange to the uninitiated. 
 
 That the Mercantile Trust Company had legal title to 
 the bonds themselves, or had any interest therein, does not 
 appear to be the fact. The only apparent interest on the 
 part of this trust company was its compensation as trustee. 
 
 On the 11th day of August, when the Bethlehem prop- 
 erties were to be turned over, the promoters of the Ship- 
 building enterprise were facing a crisis. Under the con- 
 tract for the sale of the Bethlehem property it was pro- 
 vided that the original properties of the Shipbuilding Com- 
 pany should not only be acquired, but the title vested in 
 the Shipbuilding Company, and this required the payment 
 of $6,000,000, besides the possession of a cash working 
 capital of $1,500,000. 
 
 The provisions of the agreement showing the caution 
 exercised in behalf of Mr. Schwab, to assure the full com- 
 pliance with these conditions and to assure the good faith 
 of the transactions before the Bethlehem was turned over, 
 are as follows: 
 
 "At the time of the said purchase of said shares of stock of the Bethlehem 
 Steel Company by said Nixon and Dresser and the sale to said Schwab of the 
 bonds, preferred stock and common stock to be issued by said Shipbuilding 
 Company, as herein provided for, said Shipbuilding Company shall have duly 
 
FINANCIAL AND INDUSTRIAL TRUSTS 309 
 
 purchased and become possessed of the property and assets or the capital stock 
 or both of said 'Subsidiary Companies.' 
 
 "Said Nixon and Dresser shall furnish the certificates of Messrs. Alex- 
 ander & Green. Counsel for said Shipbuilding Company, and the other 
 parties financially in interest in such form as shall he satisfactory to said 
 Schwab, of the validity of the organization of the said Shipbuilding Company, 
 of the acquisition by it of the properties, plants and assets or capital stock 
 or both of said 'Subsidiary Companies,' of the acquisition by it of said stock 
 of the said Bethlehem Steel Company, of the issuance of full paid, non-as- 
 sessable shares of preferred stock and common stock of the Shipbuilding 
 Company to be delivered to said Schwab under this agreement, and of the 
 validity thereof, and of the authorization and issue of the stocks and bonds of 
 the Shipbuilding Company, together with satisfactory evidence of the con- 
 sent and authority of all parties in interest, for the issue of the said stocks 
 and bonds of said Shipbuilding Company, as herein provided for." 
 
 To summarize, it was insisted in behalf of Mr. Schwab 
 that the Bethlehem Company should not come into the 
 combination until the other properties had been acquired 
 and paid for, the titles vested in the Shipbuilding Company 
 and the considerations for the issuance of the various se- 
 curities properly received. 
 
 The necessary certificate of Alexander & Green was 
 furnished to both J. P. Morgan & Co. and Mr. Schwab, 
 as shown by the evidence taken before ^Ir. Oliphant, 
 United States Conmiissioner, in the Shipbuilding hearing. 
 
 A cable to Young, in Paris, on August 8th, said: 
 
 "Under our contract to purchase Bethlehem, which must be consummated 
 ^^onday. we have to have all other plants fully paid for and transferred to 
 Shipbuilding Company first. This means all cash must be in hand Saturday, 
 entirely irrespective of date of option. There is a serious danger in Bethle- 
 hem matter as they will give no extension of time. Republicus." 
 
 How, then, was the money to be raised? It was sug- 
 gested that iMr. Dresser take Shipbuilding bonds which it 
 would seem were in the possession of the Mercantile Tinist 
 Company, presumably as tnistee, and obtain loans on them 
 from various institutions. 
 
 Dresser and Nixon got some loans, but they were unable 
 to get enough. Therefore, Dresser arranged with several 
 different institutions for deposits of the Trust Company 
 of the Republic's funds, and then they borrowed the 
 amount of this money individually, placing with the loan- 
 ing institution an amount of Shipbuilding bonds, double 
 the amount borrowed, giving their joint notes and the 
 
aiO L. WALTER SAMMIS 
 
 guaranty of the Trust Company of the Republic signed 
 by D. LeRoy Dresser, President. 
 
 Some of these loans were on the books of the Trust 
 Company of the Republic, but new loans were not at first 
 all put upon the books of the Trust Company of the Re- 
 public as an indebtedness of the Trust Company, but were 
 entered as contingent liabilities, and some were carried as 
 assets. 
 
 In one instance, five hundred thousand dollars were de- 
 posited in a trust company by Mr. Dresser as an interest- 
 bearing deposit, a credit to the Trust Company of the Re- 
 public. Five hundred thousand dollars were borrowed 
 from this same trust company by Mr. Dresser upon $1,000,- 
 000 of Shipbuilding bonds furnished by the Mercantile 
 Trust Company, accompanied by the joint note of ^ir. 
 Nixon and Mr. Dresser and a guaranty executed by Mr. 
 Dresser in the name of the Trust Company of the Repub- 
 lic. All of this was done, according to the testimony, in 
 the branch office of the Trust Company of the Republic at 
 71 William Street, N. Y. City, and the minutes of the Trust 
 Company of the Republic do not show that the transac- 
 tions were at the time done with the knowledge of the 
 Board of Directors. 
 
 Mr. Nixon and Mr. Dresser then took the check of the 
 other trust company, to the order of Nixon and Dresser, 
 and deposited it in the Trust Company of the Republic 
 to the credit of the loans of Nixon and Dresser. 
 
 There was a failure to observe proper banking methods. 
 
 The Knickerbocker Trust Company seems to have de- 
 clined to loan on Dresser's and Nixon's notes with the 
 collateral of the Shipbuilding bonds, and required ad- 
 ditional collateral. It therefore obtained the following 
 assignment: 
 
 "Know all Men by these Presents, that the Mercantile Trust Company, 
 a corporation of New York, hereby releases to the United States Shipbuilding 
 Company (a corporation of New Jersey), its successors or assigns, all the right, 
 title and interest of said Mercantile Trust Company in and to certain under- 
 
FINANCIAL AND INDUSTRIAL TRUSTS 311 
 
 writinp: aRTccnicnts relative to the I"i^>^t Mortjjam- l-ive IVt (cut Sinkinjc 
 Fund Gold Bonds of the said SliiiibuildinK Company, hcrct(j annexed, and 
 respectively executed by the following named Subscribers, for the amount of 
 bonds set opposite their names, to wit:" 
 
 (ITcrc follow the naiiu's of underwriters and underwrit- 
 ings amounting to $1,400,000.) 
 
 "The Mercantile Trust Company licrcby certifies to the ?aid United 
 States Shipbuildinj; Company and to each and every person who may succeed 
 to the title and interest of said Shipbuilding Company in and to any of said 
 underwriting agreements that the entire amount of nine million dollars ($9,- 
 000,000) of bonds was underwritten as provided in Condition No. 1, in said 
 agreements. 
 
 Dated August 11, 1902. 
 
 Mercantile Trust Company, 
 By A. Vy. Krech. 
 "In the presence of Vice President." 
 
 W. \V. Green." 
 
 The condition No. 1 referred to in the said certifieate 
 refers to the provision of the underwriting agreement that 
 no underwriter shall be called upon to pay until the entire 
 Jf:9,000,000 is subscribed. 
 
 This assignment was accompanied by a transfer by the 
 Shipbuilding Company, signed by James Duane Living- 
 ston, Second Vice-President, to Le^^is Nixon and D. Le- 
 Roy Dresser, which contained this recital: 
 
 "Lewis Nixon and D. LeRoy Dresser arc about to borrow from Knicker- 
 bocker Trust Company the sum of seven hundred thousand dollars (.$700,000), 
 and to assign as collateral security therefor the above described underwriting 
 agreements to the extent of the unpaid liability of the subscribers thereon, 
 together with the First Mortgage Five Per Cent Sinking Fund Gold Bonds of 
 the Shipbuilding Company to the amount in par value of $1,000,000 and 
 Preferred stock of the Shipbuilding Company to the amount of 4.000 shares 
 and Common stock of the Shipbuilding Company to the amount of 4,000 
 shares." 
 
 Upon these two documents was endorsed a second as- 
 signment in the following language: 
 
 "For value received we assign, transfer and set over to the Knickerbocker 
 Trust Company all our right, title and interest in and to the foregoing instru- 
 ment, and in the underwriting agreements therein mentioned. 
 Dated August 11. 1902. 
 
 Daniel T.eRoy Dresser, 
 Lewis Nixon." 
 "In the presence of 
 
 Brainard Tolles." 
 
 In view of the French situation tlie effect of the certifi- 
 cate of the Mercantile Trust Company that the entire 
 $9,000,000 had been underwritten is not quite clear. 
 
312 L- WALTER SAMMIS 
 
 A psychological study of Mr. Dresser's mental condi- 
 tion at this time would be interesting if it would not be 
 pitiful. He was the head of a trust company which had 
 been doing business for less than six months. Its oppor- 
 tunities at the start were almost boundless, and its stock, 
 issued at 150, was quoted around 370. A high place in the 
 financial world was open to Mr. Dresser himself as the 
 president of this company, but because of his ambition to 
 make money in large sums, regarding thousands as too 
 small to be considered and thinking only in millions, he 
 had not only thrown away his opportunity, but was in dan- 
 ger of wrecking his company. Personally he had no ex- 
 tensive credit upon which to draw if he had desired to 
 assume the responsibility for the large sum necessary to 
 purchase the constituent companies. He had reached the 
 end of his resources. He had exhausted the resources of 
 the Trust Company of the Republic. Both were in danger, 
 and he knew it. The responsibility had been skillfully 
 shifted upon his shoulders. No help seemed forthcoming 
 from the originators of the undertaking. The promises of 
 the promoters as to French financial returns were becom- 
 ing shadowy. In this predicament he sought Mr. Schwab's 
 counsel, Mr. Schwab being in Europe at the time. Mr. 
 Pam took Mr. Dresser over to the office of J. P. Morgan 
 & Co. and introduced him to Mr. Perkins. 
 
 Mr. Dresser requested a loan of $2,500,000, but Mr. 
 Perkins said he could not make loans on Shipbuilding se- 
 curities. Mr. Dresser said that he and his associates were 
 expecting to receive remittances in a week or ten days 
 from the French underwriting and would need the assis- 
 tance only that long. The evidence is that Mr. Perkins 
 was told the proceeds of the French underwriting would 
 not long be delayed. Mr. Dresser called again the next 
 day and told Mr. Perkins that several financial institutions 
 would be willing to assist them if they could have the addi- 
 tional funds, and again requested a loan* 
 
FINANCIAL AND INDUSTRIAL TRUSTS 313 
 
 'Mr. Perkins was unwilling to make a loan, ])nt ho did 
 finally say that he would deposit $2,100,000 in any three 
 responsible trust companies Mr. Dresser might name for 
 ten days or two weeks. 
 
 Mr. Dresser mentioned the Knickerbocker Trust Com- 
 pany, the Tnist Company of the Republic and the Man- 
 hattan Tiiist Company. 
 
 The Manhattan Trust Company did not accept a deposit. 
 The other two companies did receive $1,400,000, issuing 
 their certificates of deposit to J. P. Morgan & Co., and lent 
 this amount to Mr. Nixon and Mr. Dresser. 
 
 Mr. Perkins introduced Mr. Dresser to the New York 
 Security & Trust Company, which, it is said, made a loan 
 to Dresser and Nixon of $350,000, making the total assist- 
 ance secured in that way $1,750,000. 
 
 The $1,750,000 thus borrowed, while it was a great help, 
 was not sufficient to place the promoters in a position to 
 buy the properties for which they held options. They were 
 still short of the necessary cash requirements. But the 
 Trust Company of the Republic had more than $4,000,000 
 in deposits. 
 
 Methods similar to these were taken with other institu- 
 tions, until, in the joint names of Mr. Nixon and ^Ir. Dres- 
 ser, secured by the guaranty of the Tnist Company of the 
 Republic issued by Mr. Dresser, and the Shipbuilding col- 
 lateral furnished by the Mercantile Trust Company, some 
 millions were raised, sufficient to draw the checks to the 
 vendors, which checks aggregated $6,000,000. 
 
 To lend this to its own president would be an irregu- 
 larity too flagrant not to attract undesired attention at 
 some time or other, so the Trust Company of the Republic 
 made loans to Mr. Nixon, accepting therefor his note se- 
 cured by bonds and stock of the Shipbuilding Company, 
 whose entire assets consisted of Young's offer to sell the 
 Shipbuilding plants, which it could not take up for lack 
 of funds. 
 
314 L. WALTER SAMMIS 
 
 The Trust Company of the Republic had received from 
 imderwriters and subscribers $2,327,812.50, of which it had 
 contributed $250,000 of its own money. It had lent di- 
 rectly to Mr. Nixon and Mr. Dresser, or supported their 
 notes by its guaranties, $3,672,187.50. 
 
 Under these conditions the fateful day for paying for 
 the properties arrived. The Trust Company of the Re- 
 public prepared twenty-four checks, aggregating $6,000,- 
 000, fifteen of which were made out to the order of Lewis 
 Nixon, and the latter, as holder of the options through 
 Young's power of attorney, delivered the checks to Col. 
 McCook and Mr. Young for the owners of the constituent 
 companies. Besides this cash, the vendors, of whom Mr. 
 Nixon was one, were supposed to receive $4,050,000 in 
 bonds and $4,000,000 in each kind of stock. ,. 
 
 The great Shipbuilding Company was now an accom- 
 plished fact with the exception of taking over the Bethle- 
 hem. 
 
 This latter transaction, which was performed on August 
 12th, though of vast importance, was very simple. Mr. 
 Nixon and Mr. Dresser met the various parties in interest 
 in the office of J. P. Morgan & Co., and there received the 
 stock of the Bethlehem Steel Company, paying for it 
 with Mr. Schwab's check for $7,246,871.48 and passing 
 over $10,000,000 collateral mortgage bonds, $10,000,000 of 
 preferred stock and $10,000,000 of common stock, of which 
 $2,500,000 of each kind of stock was delivered to J. P. 
 Morgan & Co. as syndicate managers. It remained only for 
 the new holders of the Bethlehem stock to deposit it with 
 the New York Security and Trust Company as security 
 for the collateral mortgage. This they did without delay. 
 It is not my intention to follow the fortunes of the 
 United States Shipbuilding Company to their conclusion. 
 It is clear, however, from the disclosure of the facts, that 
 with the exception of the Bethlehem Steel Company, the 
 Union Works and the Hyde Windlass Company, the 
 
FINANCIAL AND INDUSTRIAL TRUSTS 315 
 
 constituent companies were indebted far ])eyond their 
 ability to pay, and the new trust was without the earning 
 capacity to meet the heavy fixed cliarp^es fastened upon 
 it by the promoter' issue of $16,000,000 of bonds against 
 these properties. The subsequent faihu-e and fall of the 
 company was inevitable, no matter who was in charge of 
 its affairs or how efficient its management. 
 
 I have devoted many weeks to the examination of the 
 evidence, documents and facts in connection with the en- 
 tire matter, and have carefully and thoroughly informed 
 myself from all sources of information with reference 
 thereto, and find that neither ^Iv. Schwab nor Mr. Pam 
 appear anywhere to have had any connection with the pro- 
 motion, organization or financing of the Shipbuilding en- 
 terprise or the various transactions in connection there- 
 with. 
 
 Whether in view^ of this, the criticism of Mr. Schwab in 
 securing for himself so large a consideration for the Beth- 
 lehem Steel Company stock is justified, considering that he 
 is the only one who received no cash for his property, but 
 took his entire pay in securities, is not for me to say, nor is 
 it my province to comment on the criticism and complaint 
 made against his counsel, Mr. Pam, for his faithfulness in 
 protecting his client's interests in the preparation of the 
 contract and mortgage, the terms of which have been re- 
 garded by some as tight and as exacting too much security. 
 It was Mr. Pam's effort to safeguard and protect his 
 client's interests against any unforeseen contingencies. 
 
 It is well, however, to continue with the Tnist Com- 
 pany of the Republic until the final effect of its operations 
 has been shown. The parties in interest must have fairly 
 groaned with relief when the properties were paid for, 
 although the methods ])y which they accom]ilished this re- 
 minds one rather of the shiftless Micawbcr than of any 
 other person or thing in fiction or in history. 
 
 It must also be borne in mind that this transaction was 
 
316 L. WALTER SAMMIS 
 
 all completed in a short space of time and during the 
 months of July and August of the summer of 1902, when 
 there were few if any meetings of the Board of Directors 
 of the Trust Company of the Republic. In fact, it is evi- 
 dent that Mr. Dresser, as President of the Trust Company 
 of the Republic, treated this trust company as if it were 
 the firni of Dresser & Company and he was at its head. 
 The transactions were not entered upon the minute-book of 
 either the Executive Committee or the Board of Directors. 
 Dresser and Nixon seemed to act upon Micawber's theory 
 that if the money was raised and the properties were paid 
 for it was of no importance what obligations were under- 
 taken to secure the money. Proceeds of the French under- 
 writing were to cure all ills and to cover all sins of omis- 
 sion and commission. 
 
 The troubles of the unfortunate Trust Company of the 
 Republic were just beginning. The French underwriting 
 produced not a dollar. The mouse, as a result of the 
 mountain's labor, was, compared with the result of the 
 French underwriting, magnificent, but not sufficient. Dres- 
 ser's ambition to organize a gigantic trust had been satis- 
 fied, but in the process the capital, surplus and deposits 
 of the Trust Company of the Republic had been nearly 
 wiped out and it was in an exceedingly precarious position. 
 Only immense success on the part of the creature it had 
 made could save it from the fate of Frankenstein. It had 
 gambled on the result of the French underwriting and had 
 lost. Although the great Shipbuilding Company had been 
 launched and the required $1,500,000 of working capital 
 credited to the United States Shipbuilding Company on 
 the books of the Trust Company of the Republic as of 
 August 12th, the funds therefor were lacking to meet its 
 drafts. It became necessary to provide that amount. 
 Armed with guaranties signed by Dresser in the name of 
 the Trust Company of the Republic and a vast amount of 
 Shipbuilding securities, Mr. Nixon and Mr. Dresser bor- 
 
FINANCIAL AND INDUSTRIAL TRUSTS 317 
 
 rowed, on August 30 and Septoni])cr 4 and 5, 1902, $1,500,- 
 000 from Now York banks on their notes, secured in what 
 had now become the usual manner. 
 
 The returns from the American underwriters and sub- 
 scribers were applied to tlie reduction of the o})li^ati<nis 
 of Mr. Nixon and Mr. Dresser. They brought the t(jtal 
 in which they were indebted to the Tnist Company 
 of the Republic down to $3,279,909, to repay which 
 they had nothing more substantial in sight than the French 
 underwriting. This amount w^as afterwards reduced to 
 $982,334.10. 
 
 At this point the bank examiner visited the Trust Com- 
 pany of the Republic. Its difficulties were not a matter of 
 general knowledge, and it was esteemed a most prosperous 
 institution. Its warehouse business in the South was 
 growing at a phenomenal rate, the newspapers were filled 
 with tales of its progress and its brilliant prospects in an 
 almost virgin field. But when the state bank examiner 
 finished his inspection the world was informed of the almost 
 inextricable tangle it had got into through its connection 
 with the Shipbuilding Trust, and its stock dropped to be- 
 low par. 
 
 At this critical juncture a syndicate, which became 
 Ivuown as the Sheldon Syndicate, was fonned to take over 
 the financial obligations of the Trust Company of the 
 Republic, accepting in payment therefor securities of the 
 Shipbuilding Trust. The Syndicate did take over these 
 obligations and thus relieved in part the situation. Even 
 then, had the Shipbuilding Company been established upon 
 a sound basis, or had it even acquired properties wiiich, 
 exclusive of the Bethlehem, were sound and self-support- 
 ing, the Trust Company of the Republic would have won 
 its way clear financially. But since the Shipbuilding Com- 
 pany was itself insolvent and a failure, it was not possible 
 for the Tnist Company of the Republic to realize on the 
 securities which it held of the combination and thus replace 
 
318 L. WALTER SAMMIS 
 
 tlie large amount in which it was involved. Its reputation, 
 too, had been sacrificed. 
 
 It was reorganized and is today only a memory, and 
 its history only a contention in the courts. 
 
 Do not for one moment assume that I have covered 
 the whole question of the relation of the trust company to 
 the industrial combination, and not even the whole ques- 
 tion as to the relation of these two trust companies to the 
 Shipbuilding Corporation. On the contrary, I have care- 
 fully avoided discussion of certain topics which may be the 
 subject of litigation, and I have touched only so far as was 
 necessary to fill out the lines of my view of the situation 
 upon matters pertaining thereto which are in doubt and 
 which may be the subject of litigation. 
 
 The tendency of financial institutions — known in our 
 State as ''moneyed corporations" — is to affiliate too closely 
 with industrial propositions, the ultimate outcome of which 
 cannot be adequately determined from the showings made 
 by promoters and others interested in their flotation. 
 
 There is a side of the picture which is less unpleasant 
 than the side which I have turned to you. It is that the 
 lesson which has been taught by the organization of the 
 Shipbuilding Company had a wholesome effect upon Wall 
 Street and other financial institutions. It is, too, because 
 the present Superintendent of Banks in the State of New 
 York ably supervised the adjustment of the intricate de- 
 tails, so far as his jurisdiction was concerned, that no finan- 
 cial panic resulted from a disclosure of the condition into 
 which the Trust Company of the Republic had been led by 
 its president. 
 
 I have no time to draw a parallel, but I think that those 
 who are familiar with the history of similar undertakings 
 in England and Scotland will admit that they show a more 
 dangerous affiliation in those countries between financial 
 institutions and industrial promotions. Across the water 
 jnany men of high financial position acted as directors of 
 
FINANCIAL AND INDUSTRIAL TRUSTS 319 
 
 flotations wliicli were similar to this ouc, ])iit which had 
 really a less stahle foundation. Many financial institutions 
 not only fathered industrial propositions which failed to 
 turn out as expected, but they endorsed them. The result 
 was that in Eni^land, after a collapse, financial institution 
 after financial institution closed its dooi's and a panic 
 resulted. 
 
 From the standpoint of a single individual, I believe 
 that I have portrayed to you the final example of an under- 
 taking of the kind which I have been describing. Today, 
 as a consequence of the lesson which has been learned 
 through the false establishment of the United States Ship- 
 building Company, our financial leaders and our financial 
 institutions arc gradually withdrawing from affiliations 
 with industrial combinations, and each one is assuming its 
 true position. 
 
 You will agree w^th me that the institution and the 
 industrial combination are of value, each in its place, but a 
 close partnership between the two is dangerous, inasmuch 
 as the financial institution and the industrial combination 
 must necessarily stand upon a different footing in their 
 relations to the public. The salve in the situation is that 
 the general public did not become a participator in the 
 flotation of which I have been speaking, and did not invest 
 largely in the securities of the Shipbuilding Company. 
 
 The result has been imfortunate for those who did 
 become investors, but the heaviest loss fell upon those who 
 were in a better financial position to stand it, namely, the 
 underwriters, who entered for profit and who exj^ected 
 large returns with but little responsibility. 
 
 Even in the case of the Trust Company of the Republic 
 it is a subject for congratulation that through the wiser 
 subsequent management which undertook its reorganiza- 
 tion, its integrity has been maintained, its financial credit 
 has been sustained and as a consequence of the assistance 
 rendered bv the men who foniied what is known as the 
 
B20 L. WALTER SAMMIS 
 
 Sheldon Syndicate, who can well afford the loss, it is in 
 a position where it can continue business and place itself 
 before both the public and the financial world as an insti- 
 tution of probity and integrity. 
 
 I apprehend that you would like to hear a narration 
 of the entanglements of Governor Odell of the State of 
 New York, Mr. J. Pierpont Morgan and his firm, the bank- 
 ing house of Harris, Gates & Co., and many others who be- 
 came collaterally interested; but it is impossible for me to 
 enter upon these various subjects. 
 
 I leave therefore this matter with you, having attempted 
 to tell you briefly and succinctly and yet as correctly as I 
 have been able and without bias, the true history of the 
 organization of the United States Shipbuilding Company. 
 
SOME ASPECTS OF NEW JERSEY'S CORPORATE 
 
 POLICY. 
 
 BY HON. JAMES B. DILL. 
 
 [Of the Court of Errors and Appeals of New Jersey.] 
 
 INTRODUCTION. 
 
 If an advocacy without criticism of New Jersey's cor- 
 porate policy is anticipated, such expectation will meet 
 with disappointment. 
 
 The topic leads to a discussion upon a higher plane than 
 that of a mere history or definition of New Jersey's corpo- 
 rate law, or an inquiry as to whether the state has made 
 money by its policy. 
 
 It suggests a consideration of the resulting and far- 
 reaching effect of New Jersey's policy as found in the trend 
 of the corporation laws of the various states, and the effect, 
 not alone upon the State of New Jersey, not alone upon 
 other states who have been and are adopting New Jersey's 
 corporation laws, but upon the country at large, and, finally, 
 upon the general industrial situation. 
 
 No aspect of New Jersey's corporate policy would be 
 complete without at least the side lights of the struggle 
 between New York, the financial Empire State, and the 
 adjoining smaller State of New Jersey, for corporate 
 supremacy. 
 
 Hence we may profitably trace the course of corporate 
 legislation in New York for the past decade, analyzing the 
 attempt of New York to outlegislate New Jersey, to stop 
 the outflow of capital to New Jersey for incorporation and 
 to acquire corporate prestige for herself. By way of con- 
 trast the history of New Jersey's acts for a like period is of 
 interest, not passing those enactments in which the legisla- 
 
 321 
 
 B— II— 21 
 
322 JAMES B. DILL 
 
 ture seemed to have nodded encouragement, if nothing 
 more, to large corporations. 
 
 A comparison of the corporate procedure of New York 
 with that of New Jersey for the past ten years indicates 
 that New York has been engaged in the business of letting 
 dowTi the bars, while New Jersey has deemed it the better 
 policy to put them up, at least in certain directions, notably 
 in the matter of required publicity. Both states appear 
 to have been working along different lines of policy to at- 
 tract corporations and New Jersey is generally thought to 
 have been the more successful. 
 
 From this comparison it may be argued that success in 
 attracting corporate capital does not always lie along lines 
 of mere liberality or laxity of statutory enactments. 
 
 The secret of New Jersey's success, so far as it be suc- 
 cess, to attract corporate capital, does not lie in the so- 
 called liberality of her laws, or in laxity of procedure, but 
 in other elements of her public administration, which may 
 properly be discussed later. 
 
 Only the width of the North River separates New 
 Jersey from the principal city of New York State, the 
 financial center of the country. In that city corporations 
 of prominence throughout the United States have offices, 
 and from there the executive officers of most of the great 
 industrial corporations organized during the last few years 
 direct the operations and manage the finances of their sev- 
 eral companies. The great majority of these companies 
 thus operated in New York State are corporations having, 
 not New York charters, but New Jersey charters. 
 
 I. NEW YORK LEGISLATION. 
 
 In 1892 in the State of New York, with a New Jersey 
 charter, with New Jersey powers and more than New Jer- 
 sey's freedom from state supervision and publicity, and at 
 a reduced incorporation tax, there was incorporated by 
 special act of the New York Legislature one of the larger 
 
NEW JERSEY'S CORPORATE POLICY 323 
 
 business corporations existing under New York laws — the 
 General Electric Company. 
 
 Governor Flower in approving the bill said in substance : 
 
 "The measure is approved because its objects cannot be secured under the 
 general law. and because its approval will keep within the state a corporation 
 ready to invest a large amount of capital, and which, without the concessions 
 allowed by its proposed charter, would be incorporated under the laws of New 
 Jersey. • . , 
 
 "The reduction of the tax for incorporation from one-eighth of one per 
 cent upon the capital stock is to make the tax uniform with that required by 
 the laws of New Jersey so far as this corporation is affected." 
 
 One of the conservative New York City dailies in 1892 
 said: 
 
 "New York has for years been driving its corporations and its corporate 
 capital and taxable property out of the state into New Jersey and other states 
 where enterprise is welcomed instead of persecuted." 
 
 The Chamber of Commerce of New York City sought 
 to procure 
 
 "A change in the corporation laws which drive so many industrial enter- 
 prises to other states for organization," 
 
 but without result. 
 
 The situation was officially summed up in the report 
 of the comptroller of the State of New York: 
 
 "It is time that great corporations having their actual headquarters in 
 this state and a nominal office elsewhere, doing nearly all of their business 
 within our borders, should be brought within the jurisdiction of this state, 
 not only as to matters of taxation, but in respect to other and equally impor- 
 tant affairs. 
 
 "This can be accomplished by the adoption of^ corporation laws worthy 
 of the greatest commercial state in the Union. 
 
 "It is a sad commentary upon our system that our tax list reflects little 
 of the great wave of organization that has swept over the country during the 
 past year, and to which this state contributed more capital than any other 
 state in the Union." 
 
 New Jersey appeared to be attracting coii:)orations 
 away from New York and legislative effort was made to 
 induce capital to return to the state. 
 
 One effort was in the direction of a lessening of the 
 degree of corjoorate publicity. 
 
 From 1848 to 1890 practical publicity had been required 
 as to capital, debts, liability and stockholders, annual re- 
 ports containing such data being required to be verified, filed 
 
324 JAMES B. DILL 
 
 and published. This degree of publicity was lessened some- 
 Avhat by the provisions of the ''Stock Corporation Law." 
 
 In 1890 the "Stock Corporation Law" required business 
 corporations to file annually a report stating the amount 
 of capital stock and the proportion actually paid in; the 
 amount and nature of its existing assets and debts and all 
 its receipts and expenditures during the year; the names 
 of stockholders; and the dividends, if any, declared— in 
 substance, a re-enactment of the Act of 1875, but omitting 
 the requirement that the report be published. 
 
 Li 1892 the law was amended, eliminating publicity 
 except the amount of capital stock and the proportion 
 actually issued; the amount which the debts at the date of 
 the signing of the report do not exceed; and the amount 
 which its assets at least equal. 
 
 These were requirements amounting to nothing; a 
 statement "that the debts do not exceed one million dol- 
 lars" and "assets at least equal one dollar" complied with 
 the statute and gave no infomiation to the public, and re- 
 ports in substantially this form were actually filed by im- 
 portant corporations and accepted as a compliance with 
 the statute. 
 
 Later a new section was added to the act, under which 
 any corporation could avoid publicity by adding to its eon- 
 tracts specific words of waiver of the individual statutory 
 liability of the stockholder and director. 
 
 TVhen Theodore Roosevelt was elected Governor of the 
 State of New York he appointed a commission to draft a 
 code of corporation laws. The result of the work of this 
 commission was the Roosevelt Corporation Act, which 
 failed to pass the legislature. 
 
 The reason for the defeat of that act seems to have 
 been a failure on the part of the dominant powers in New 
 York State to grasp the true situation. The opposition 
 to it was grounded in the belief of the dominant political 
 powers that corporate capital would be attracted by liber- 
 
NEW JERSEY'S CORPORATE POLICY 325 
 
 alit.y — so-rallod — of rorporato onaetmmts and l)y the orca- 
 tion of so-called attractive features. 
 The principal changes have heen: 
 
 1. The reduction of the incorporation tax from one- 
 eighth to one-twentieth of one per cent on the authorized 
 capital. 
 
 2. The doing away with the necessity of filing an an- 
 nual report or statement, unless and only after demand by 
 a creditor or stockholder. 
 
 3. Enlarged powers for borrowing money. 
 
 4. Removal of any restriction upon the power to con- 
 tract indebtedness. 
 
 5. Power imaccompanied by responsibility, in the issue 
 of stock, it being issuable for property, or for that great 
 medium of ''water," sendees, as well as for other consider- 
 ations. 
 
 6. Creation of preferred stock hy the vote of two- 
 thirds, with little power in the remaining one-third to 
 effectually object. 
 
 7. The issue of partially paid stock. 
 
 8. Limiting stockholders' access to the stock books to 
 three hours of the business day. 
 
 9. Permitting the pooling of stocks and the issue of 
 charters with broad and heterogeneous powers. 
 
 10. Authorizing the election as directors of persons 
 who are not stockholders. 
 
 Result. 
 
 These so-called attractive features did not seem to linng 
 great corporations into the 8tate of New York. 
 
 The great cor]:)orations, financed by New York men, 
 with New York capital, continued to go into the State of 
 New Jersey for incorporation, returning to the State of 
 New York to be treated as foreign corporations, although 
 it is within the latter state that they transact their princi- 
 pal financial business and maintain their great financial 
 
326 JAMES B. DILL 
 
 headquarters. Had the Roosevelt Corporation Act been 
 passed, it is likely that results would have been different. 
 
 n. NEW JERSEY LEGISLATION. 
 
 An examination of the history of New Jersey's corpo- 
 rate policy for the same period may lead to the conclusion 
 that New Jersey more truly grasped the situation and 
 adopted the theory that by raising rather than lowering 
 the standard of corporate legislation corporate capital 
 would be attracted. 
 
 In 1895 the Legislature of New Jersey appointed a com- 
 mission to revise and codify the Act Concerning Corpora- 
 tions and ^*to incorporate such amendments as they might 
 deem mse and necessary to perfect the system of general 
 corporation laws of the state." 
 
 Revision of 1896. 
 
 The revision of 1896 was intended to meet the modem 
 tendency of business concerns to incorporate. It recog- 
 nized the commercial need for a scheme of organization 
 for private companies as distinguished from public corpo- 
 rations, the salient features of which scheme were sim- 
 plicity of organization and freedom of internal manage- 
 ment, including dissolution, without recourse to judicial 
 proceedings. 
 
 New Jersey in this revision also recognized the demand 
 of the times for extra-territorial corporations — corpora- 
 tions which should clearly have the power, so far as the 
 state of their creation could confer it, to go forth and en- 
 gage in business in other states. 
 
 This revision made possible the formation of the great 
 corporations of today, whose business is as far-reaching as 
 civilization itself, not mere paper organizations, but such 
 institutions as the United States Steel Corporation and 
 others of the same caliber. 
 
 It went back for some of its principles to that grea^ 
 
NEW JERSEY'S CORPORATE POLICY 327 
 
 organization in 1791 which was framed by Alexander Ham- 
 ilton. 
 
 It did no violence to the salient features of the revision 
 of 184G; it eliminated certain crude features of the laws of 
 1875, broadened powers, removed useless restrictions and 
 laid in 1896 the foundation for the laws which in 1903 were 
 to prove so serious a barrier to the realization of New 
 York's hope of financial returns by way of corporation 
 taxes. 
 
 New Jersey answ^ered questions as to the line of demar- 
 cation between the tramp company and the legitimate cor- 
 poration with extra-territorial powers. 
 
 She insisted upon the rule of publicity, of location, of 
 registration for her corporations, and under that law^ the 
 principal office became the registered office, and by statu- 
 tory enactment the two terms became synonymous. 
 
 In 1898 there was created a commission to revise the 
 financial laws of the State of New^ Jersey. At or about this 
 time New^ York especially, and New Jersey to a lesser de- 
 gree, were infested by corporations organized under the 
 laws of other states using a banking or trust company 
 name without any of the safeguarding provisions of finan- 
 cial institutions. In other words, such companies were 
 bogus banks, bogus trust companies and frauds upon the 
 public because they styled themselves banks and trust com- 
 panies, assuming that the public would believe, from their 
 name, that they were institutions safeguarded by financial 
 provisions, whereas, as a matter of fact they might be the 
 merest shells organized under the laws of some state which 
 did not clearly prohibit the use of a banking name to a 
 non-banking company. 
 
 In the State of New York there was introduced the 
 Slater Bill, which prohibited either a foreign or domestic 
 corporation from the use of a fictitious banking name, that 
 is to say, it forbade the name of a trust company or bank 
 to be used by a coi^poration, foreign or domestic, unless it 
 
328 JAMES B. DILL 
 
 was actually a financial institution subject to the bank- 
 ing department of the State of Ncav York. 
 
 Strange to say this bill Avas defeated in the New York 
 Legislature, being considered a departure from the policy 
 of the State of New York to create attractive features 
 for corporations. 
 
 New Jersey's action in this respect is worthy of mention 
 by way of contrast. While the banking laws of the State of 
 New Jersey were put upon a safe and sound foundation by 
 the commission, nevertheless that commission jout in force 
 restricted and sweeping prohibitions against the use of 
 financial names by any company, foreign or domestic, ex- 
 cepting an actual financial institution organized and doing 
 a banking business, subject to the banking laws of the 
 state. 
 
 Moreover, the State of New Jersey drew a sharp line 
 of distinction between financial and non-financial corpora- 
 tions, prohibiting not only the use of a financial name to 
 a non-financial corporation, but first giving all of the ordi- 
 nary financial powers to trust companies and banks, and 
 then on the other side as strongly prohibiting not only 
 their use to other corporations, but prohibiting any at- 
 tempt to recite such powers in the certificate of organiza- 
 tion of a business company. 
 
 No attempt at this juncture will be made to describe 
 the banking revision of the State of New Jersey, although 
 is has played its part in the history of that state, more 
 than to say it was along the same lines of carefully con- 
 sidered policy as the General Corporation Act, and that 
 it was intended to facilitate the organization of banks and 
 trust companies under the state law and to draw financial 
 capital from New York to New Jersey. It Avas intended 
 to do just what it has accomjolished, and Exchange Place 
 and other streets in Jersey City running to the ferry now 
 constitute a financial district familiarly known as West 
 Wall Street. 
 
NEW JERSEY'S CORPORATE POLICY 329 
 
 AVliilo New York was removin^^ every vestige of re- 
 quired publicity on tlie part oflier corporations, New Jersey 
 looked at the matter from a different point of view. She 
 decided that New York was making a mistake and that 
 she would not only maintain the de^a-ee of publicity there- 
 tofore required, but would go one step further. 
 
 Chapter 124 of the Laws of 1900 was a provision which 
 not only was intended to enforce, but as a matter of actual 
 result has enforced the theory of private publicity in the 
 State of New Jersey. 
 
 Corporations are required to file an annual report, 
 signed by two directors, or by the president and another 
 officer, which report must give the name of the corpora- 
 tion, the location of its registered office in New Jersey and 
 the name of the agent in charge of such office, who must 
 be either a resident of New Jersey of full age, or a coi-po- 
 ration under the Banking Act. 
 
 The report is also required to state the character of 
 the business actually carried on, the amount of authorized 
 capital, the amount actually issued and outstanding, and 
 by another existing statute coi-porations are required to 
 state separately the amount paid in money and the amount 
 of stock issued for property. The names and addresses 
 of the directors and officei-s of the company and when 
 the term of each expires are required. The date of the 
 next annual meeting must be given and, what is most 
 important, the officers are required in the report to certify 
 whether or not the name of the company has been dis- 
 played at its registered office, whether or not the corpora- 
 tion has maintained a registered office and has kept a 
 stock transfer book and a stock book, and whether or not 
 these books have been at all times during business hours 
 open to the inspection of stockholders. 
 
 A false statement in a corporation's report will render 
 persons signing the report liable for the debts of the com- 
 pany, and is equivalent to perjury. 
 
330 JAMES B. DILL 
 
 New Jersey adopted a penalty for failure to file that 
 report which has not been, for effectiveness, excelled by 
 the provisions of many other states. It provided that, if 
 the report should not be filed and the officers should refuse 
 to sign it, officers and directors should thereupon go out 
 of office and be ineligible for the space of a year. 
 
 Thus while New York was receding from the doctrine 
 of publicity, New Jersey was fastening her policy of private 
 publicity upon corporations in such a way that it could 
 neither be avoided nor evaded. 
 
 The legislature carried this theory of publicity a step 
 further. It took aw^ay from corporations the power to 
 create preferences and distinctions in stocks by mere reso- 
 lution of the board, or by mere provision of the by-laws 
 which might or might not be public property, by providing 
 that all such restrictions, limitations and differentiations 
 in stocks must be stated in the certificate of incorporation 
 and filed in the office of the secretary of state. 
 
 As to companies previously existent, it provided that 
 such alterations might and should be embodied in amend- 
 ments to the existing certificates of incorporation. In a 
 word, it required a public record to be officially made of 
 limitations upon and differentiations between the rights of 
 stockholders as contained in so-called preference shares. 
 
 III. SOME POINTS OF CONTRAST BETWEEN NEW 
 YORK AND NEW JERSEY LAWS. 
 
 The contrast between the corporate policy of New York 
 and New Jersey suggests the reason, and perhaps the re- 
 spects in which New Jersey has been successful in the 
 effort to attract corporate capital. 
 
 The Business Corporation Statutes. 
 
 The laws of the State of New York applicable solely to 
 business corporations do not by themselves constitute a 
 complete code. 
 
NEW JERSEY'S CORPORATE POLICY 331 
 
 One must apply to tlio statutes of New York a process 
 of elimination to determine what laws are applicable to 
 business corporations. This arises from the fact that in 
 many instances statutes are enacted relative to corpora- 
 tions other than business corporations, and such statutes, 
 or portions thereof, are made applicable to and binding 
 upon business corporations. 
 
 Specific sections of various acts are made applicable to 
 business corporations, with the result that it is well-nii^h 
 impracticable to gather together the laws which apply ex- 
 clusively to business corporations, and to make of them a 
 distinct compilation. 
 
 On the other hand, the laws of New Jersey relating to 
 l)usiness corporations are embraced in a single codification 
 known as the "Act Concerning Corporations" (Revision of 
 1896), and this revision as published by the secretary of 
 state, exclusive of annotation, decisions and forms, covers 
 about foi*ty-five pages. 
 
 Special Charters. 
 
 Under the laws of New Jersey special charters cannot 
 be granted, but all must come under the appropriate gen- 
 eral acts, with the result that no organization can by spe- 
 cial favor of the legislature obtain an advantage over 
 another of the same class. In New York special charters 
 are obtainable. 
 
 The Certificate of Incorporation. 
 
 A certificate of incorporation of New York carries less 
 weight than one issued under the laws of New Jersey. 
 
 Under the laws of New York the recitation of powers 
 and rights contained in the certificate of incorporation arc 
 by no means conclusive evidence, and a charter under the 
 general laws does not rank with a special charter granted 
 by act of the legislature. Hence special charters are 
 sought and not infrequently obtained. 
 
332 JAMES B. DILL 
 
 The courts of New Jersey, however, have decided that 
 a certificate of incorporation is equivalent to a special act 
 of the legislature and that it cannot be attacked collater- 
 ally, that it is evidence of the rights and powers therein 
 set forth, and that it can be attacked only by an action 
 l^rought by the Attorney-General for that purpose. Thus, 
 the importance of a certificate of incorporation in New 
 Jersey is readily seen. 
 
 The same constitution which is the foundation for this 
 principle forbids special favors from the legislature in the 
 forai of special charters. 
 
 Extra-Territorial Powers. 
 
 The laws of the State of New York, unlike those of New 
 Jersey, contain no specific provisions for extra-territorial 
 powers for its corporations. 
 
 New Jersey, however, limiting the powers of the cor- 
 poration to transact business within or without the state to 
 lawful business, and thus making the company subject to 
 local laws of the state into which it goes, expressly au- 
 thorizes by statute its corporations to do business outside 
 of New Jersey. 
 
 New Jersey says to its corporations — provided you limit 
 your transactions to business which is lawful at home and 
 when transacted abroad also lawful by laws local to the 
 transaction, then you may do business abroad. 
 
 As indirectl}^ connected with this attitude of New 
 Jersey towards other states, she does not attempt to tax 
 the property, tangible or intangible, of her corporations 
 where situated without the state, but relegates her corpo- 
 rations in that respect to the tax authorities of the states 
 in which tlie property is located. 
 
 The contrary, however, is New York's position. 
 
 People ex rel. United Verde Copper Co. vs. 
 Feitner, 54 Appellate Div. Rep. (N. Y.), 217. 
 
NEW JERSEY'S CORPORATE POLICY 333 
 
 Taxation. 
 
 Tlie tax systems of Now York and New Jersey present 
 a marked difference. 
 
 In determininf:: the taxes in the State of New York, the 
 clement of discretion on tlic part of the taxing l)oard or 
 taxing officials, which often means the individual taxing 
 officer, or the employe upon whom he relies to do the work, 
 plays an important, sometimes a controlling, part. 
 
 This discretion fixes the amount of the tax. 
 
 Discretion, by the words of the statute limited to official 
 discretion, is one of the corner stones of the New York tax 
 system. In New York the tax question is not merely a 
 mathematical proposition worked upon the jiublic black- 
 board. 
 
 In New Jersey, however, the tax question is one into 
 which discretion cannot enter. The one-tenth of one per 
 cent upon the capital issued and paid up is the basis for 
 the fraction which must be worked out on the public black- 
 board in plain view of all parties. No influence, political 
 or otherwise, can change the amount of the tax. One-tenth 
 of one per cent of the capital issued and outstanding 
 fixes both the numerator and the denominator of the frac- 
 tion. 
 
 We have seen parallel columns of tabulated figures 
 showing the difference between the taxes in New York and 
 New Jersey, and showing how much cheaper it is to organ- 
 ize in the State of New York, ])ut we have not seen included 
 in these compilations one feature of New York's taxation — 
 the local tax. 
 
 In the State of New York, the corporation pays a fran- 
 chise tax, the annual comptroller's tax, and also the local 
 tax. This local tax in New York City is about two per cent 
 on the corporation's capital employed in the state. 
 
 New York holds that a corporation organized under its 
 laws although engaged in business outside of that state, is 
 
334 JAMES B. DILL 
 
 taxable in New York upon bank deposits outside of New 
 York, and on bills and accounts receivable for goods sold 
 outside of the state to persons outside. 
 
 It is also taxable on debts due to the New York com- 
 pany for business wholly carried on out of the state. 
 
 It is taxable on intangible assets. 
 
 The Court of Appeals in affirming the decision of the 
 Supreme Court (People ex rel. United Verde Copper Co. vs. 
 Feitner, 54 App. Div., 217) confirmed the doctrine that a 
 New York corporation is locally taxable on its intangible 
 assets, although situated without the State of New York — 
 that bank balances, bonds and stocks of other companies, 
 accounts payable to the New York company, were taxable 
 in New York and, in the case in question, taxable in the 
 City of New York. 
 
 This decision, it is said, drove the United Verde Copper 
 Company, a New York corporation (Senator Clark's great 
 mining company), to go out of New York as a domestic 
 corporation and to come back under a charter obtained from 
 another state authorizing it to do the same business in New 
 York that it had done before, but leaving New York with- 
 out the power to tax the United Verde Copper Company, 
 as a foreign corporation, upon scarcely more than a tithe 
 of its personal property upon which it had been taxed as a 
 New York corporation. 
 
 In the year in which the United Verde Copper Company 
 was a New York corporation, it paid to New York City 
 alone taxes to the amount of about $34,000 on an assessed 
 valuation of $1,443,920, and the court said that $1,000,000 
 might properly have been added to that assessed valuation. 
 
 In the next year the same company, as a foreign cor- 
 poration, is said to have paid to New York City taxes of 
 only $235 upon an assessed valuation of $10,000. 
 
 The capitalization, location and quantity of assets, and 
 the business of the corporation were said to be practically 
 the same in both years. 
 
NEW JERSEY'S CORPORATE POLICY 335 
 
 The difference in annual eliarges between ^34,000 and 
 $235 is asserted to have been the net disadvantage of being 
 a New York corporation, from the tax standpoint. 
 
 New Jersey, however, does not tax property situated 
 without the state, or debts due the company which are the 
 result of transactions without the state. In practice it 
 accepts the one-tenth of one per cent, the annual assess- 
 ment, as in lieu of all other taxes, excepting those upon 
 real estate or plants actually within the state. 
 
 From New York City's local taxes to the township of 
 Esopus is not so violent a transition in the subject as would 
 seem. 
 
 From the records of the office of the secretary of state 
 at Albany one might be justified in assuming that Esopus 
 was a large and flourishing cit}-. It is on paper the prin- 
 cipal office of many large and well-known corporations, 
 both manufacturing and otherwise. More than one New 
 York City business enterprise, having a rated capital in 
 the millions, has its principal office on paper at Esopus. 
 
 Esopus, however, instead of being a large and flourish- 
 ing city, is a channing country village on the Hudson River. 
 
 No inconsiderable part of the taxes of the township of 
 Esopus are paid hy the corporations which have no further 
 acquaintance with Esopus than that descri])ed by Judge 
 Finch in the Buffalo Steamboat case. On every day except- 
 ing the day of the annual meeting of these corporations the 
 interests are represented and guarded by the solitary sign 
 Ijearing their name. 
 
 Esopus owes its fame as a city of refuge for corpora- 
 tions to the tax doctrine established by the Court of Ap- 
 peals in the Buffalo Steamboat case, specifically the Union 
 Steamboat Co., Respondent, vs. The City of Buffalo, Appel- 
 lant (82 N. Y., 351), in which case the Court of Appeals 
 held that for the purpose of taxation, the designation of 
 the place in which the principal office is to be located, in 
 the certificate of incorporation of a company, is conclusive; 
 
336 JAMES B. DILL 
 
 and in the county thus designated alone can the personal 
 property of the corporation be lawfully taxed. 
 Finch, J., said: 
 
 "It is urged also that the purpose for which the principal office of the 
 plaintiff was located, in the county of Rockland, was to avoid taxation. That 
 may be * * *. We have nothing to do with the motive. We can deal only 
 with the fact. If such an evil exists, another authority than ours must provide 
 for its correction." (P. 356.) 
 
 Hence the tax system of New York presents further 
 inequalities, inasmuch as a corporation with a million dol- 
 lars of taxable personal assets in New York or any other 
 city in the state may by a paper location in Esopus, N. Y., 
 wholly escape New York City's personal taxes, while its 
 next-door neighbor, if not posted as to the advantages of 
 Esopus-on-the-Hudson, annually pays a tax of some thou- 
 sands of dollars. 
 
 New York's system of taxation is in vital particulars 
 diametrically opposed to the New Jersey system of a uni- 
 form rate upon a publicly specified amount. 
 
 The doctrine of avoidance is often, if not generally, 
 sought to be applied to New York's system of taxation. 
 
 Corporations and business houses generally, especially 
 in New York City, are annually the recipients of communi- 
 cations from gentlemen claiming to be members of the bar, 
 from members of the bar doing business under or in con- 
 nection with corporations organized for that purpose, from 
 persons claiming to be ex-tax department employes — 
 claiming both special and specific ability to reduce current 
 taxes. 
 
 Each claims to be possessed of special advantages along 
 the line of discretionary influence or Esopian tax exemp- 
 tion locations 
 
 Quite recently it became apparent that some one or 
 more of the New York tax-dodging agencies each year ob- 
 tained in advance a list of persons and corporations per- 
 sonally taxed and the amount of these taxes and used this 
 list and the information therein contained as a basis for 
 
NEW JERSEY'S CORPORATE POLICY 337 
 
 their advcrtisiiicf. ^lore than this, ])()liti('al and even de- 
 pa rtnuMital inthience was so Ixddly and so ])lainly claimed 
 that the tax department felt it inciiinhcnt njjon it in an 
 (if'fieial capacit}^ to deny these claims of inlhiencc. 
 
 There is no history of a New Jersey eirenlarization of 
 New Jersey comi)anies offering to procnre a rednction of 
 New Jersey taxes on New Jersey corporations. 
 
 The one-tenth of one per cent on the puhlished capital 
 issned and ontstandin^- offers no field for Esopian geninses 
 or for sjjecial advantages, mathematical, political or other- 
 wise. 
 
 The Courts. 
 
 Under the New York law it is necessary in making cer- 
 tain corporate alterations, snch as change of name, to apply 
 to the conrt for permission. Snch an application generally 
 results in a reference and a hearing, referee's fees, public 
 advertisements and other disbnrsements, a report to the 
 court, and a decision of the court, the whole involving an 
 expenditure of time and money. 
 
 In New Jersey, such matters are within the powers of 
 the stockholders to transact without going to the courts, 
 and without the intervention of referees and the pa^nent 
 of their fees. 
 
 In New York a receiver may be appointed by any Su- 
 preme Court Judge sitting in any part of the state, and the 
 l)roceeding may be ex parte. 
 
 In New Jersey there is only one official who can ap])oint 
 a receiver for the corporation, and that is the chancellor. 
 
 Registration System. 
 
 One must not pass by the advantage which has come to 
 the State of New Jersey in the requirement that all corj^ora- 
 tions must be registered. This registration is with a citizen 
 of the state or a trust or other company authorized by law 
 to act as registered agent of other corporations. 
 
 B— II— 22 
 
338 JAMES B. DILL 
 
 Today this authorization is concentrated in trust com- 
 panies. 
 
 The system has resulted in the creation of the business 
 of registering and caring for corporations, or, as it is com- 
 monly put, of providing and maintaining a registered office. 
 
 These registration companies have played an important 
 part in bringing corporations to New Jersey. 
 
 Their business depends upon the number of companies 
 which they register imder the New Jersey laws, and they 
 have become canvassers, although unofficially, for the State 
 of New Jersey, to secure business for that state. 
 
 It is due not only to the laws of New Jersey that she has 
 obtained great financial success, but also in part to the fact 
 that her laws are so widely known that her advantages have 
 been so thoroughly advertised. New Jersey has had a keen 
 eye to the business end of her corporation policy. 
 
 IV. RESULTS. 
 The Results to the State of New Jersey. 
 
 From a financial standpoint there can be no question 
 that New Jersey's corporate policy has been pre-eminently 
 successful. 
 
 A few years ago the state showed a deficiency in various 
 departments. There was a state tax and a state debt. The 
 railroads were compelled to bear a heavy burden of taxation 
 and New Jersey was then doing precisely what New York is 
 now doing, making those corporations which could not get 
 away pay the expenses of running the state. 
 
 The corporate policy of New Jersey, as shaped by 
 Henry C. Kelsey, for twenty-seven years Secretary of State, 
 has changed the situation and brought sufficient funds to 
 wipe out the state debt, to pay all of the current state 
 expenditures and to enable the state to make liberal appro- 
 priations each year for public improvements. 
 
NEW JERSEY'S CORPORATE POLICY 339 
 
 For years there lias been no state tax, and the impor- 
 tance of the tax on personal property in New Jersey has 
 practically disappeared. 
 
 With a marked increase of state expenditures, with a 
 large appropriation for good roads, for schools, public insti- 
 tutions, annories, etc., nevertheless the report of the comp- 
 troller of the state in 1903 showed a surplus of some 
 $3,000,000. 
 
 The state receives from the annual franchise tax on 
 corporations maintaining a registered office within its bor- 
 ders somewhat more than $3,000,000 each year. 
 
 Banks. 
 
 The revision of the l)anking laws, as I have already said, 
 was eminently successful in drawing banking capital from 
 New York to Xew Jersey. 
 
 New Jersey has abandoned all attempts to tax bank 
 balances, holding to the theory that the presence of money 
 is worth to the state more than the tax which would drive 
 it away. 
 
 Industries. 
 
 Tlie corporate policy of New Jersey has had a marked 
 effect upon her industrial growth. 
 
 Many large organizations fomied first in New Jersey 
 with the intent only of maintaining a registered existence 
 there, after becoming acquainted with the administration 
 of her laws, and her system of taxati(jn, have been induced 
 by these and other considerations to locate plants within 
 the state, instead of the one formerly chosen for location. 
 
 Taxation in New York has driven many corporations 
 across the North Eiver, where they have found rent cheaper, 
 labor more plentiful and money easily obtained, as well as 
 taxes lessened. 
 
340 JAMES B. DILL 
 
 The Bar. 
 
 Another result of the corporate policy of New Jersey 
 has been the bringing of desirable business to members of 
 the bar of the state. 
 
 Questions of internal corporate management are rele- 
 gated back to the courts of New Jersey for decision, with 
 the result that the members of the bar of that state are 
 busy and are engaged under important retainers. 
 
 New Jersey is today the stomi center of the great cor- 
 porate litigation. 
 
 The Legislature. 
 
 The Legislature of New Jersey is undoubtedly friendly 
 to corporations. It is inclined to be friendly to those meas- 
 ures which tend to bring corporations to the state. 
 
 Nevertheless after an acquaintance with the Legisla- 
 ture of New Jersey one can say with truth that there is 
 less of the charging of the "Black Horse Brigade" at Tren- 
 ton than according to report is witnessed at many other 
 state capitals. 
 
 One reason for this state of affairs is that one of the 
 influential powers, the railroads, is recognizing the fact that 
 the increase of corporations, with the corresponding in- 
 crease of corporate returns, safeguards the railroads against 
 oppressive taxation. 
 
 The railroads and other influential factors are, however, 
 aware that the legislation must be intelligent and reason- 
 able, and of a character to meet public criticism from the 
 economic point of view, if corporations are to continue to 
 come to the state. Therefore the influence of the legisla- 
 ture is largely towards that which is right in corporate legis- 
 lation, and it is safe to assert that a *' strike" measure 
 rarely sees the light of day, after having been referred to 
 committee. 
 
NEW JERSEY'S CORPORATE POLICY 341 
 
 The Bench. 
 
 A strong inducement to the intellic^ont eapitalist to eome 
 into New Jersey for incorporation is the liigh character of 
 the bench. 
 
 The great bulwark against improper legislation, against 
 pro-corporate legislation in the State of New Jersey has 
 been the attitude of the judges in the administration of 
 the corporation laws. 
 
 Tlie independence of the judges and their tendency to 
 do what is riglit rather than what seems popular is not to be 
 passed by without comment. 
 
 Tlie decision of the Court of Errors and Appeals in the 
 American Plaiting Company case, holding directors liable 
 for the distribution of unearned dividends, although the cor- 
 poration was not insolvent, brushing away the mere gram- 
 matical distinctions, is an example of the position taken by 
 the judges of New Jersey in regard to the corporation laws. 
 
 V. THE INFLUENCE UPON OTHER STATES. 
 
 New Jersey's financial success appears to have had an 
 unfortunate influence upon the corporate policy of some 
 other states. Some charter-granting states have looked 
 at the question of success or failure entirely from the finan- 
 cial standpoint. They have assumed that corporations went 
 to New Jersey solely because of certain popular features in 
 her laws. They have assumed that these popular features 
 were the so-called ''liberal" features, and so they have at- 
 tempted to out-Jersey New Jersey by removing every re- 
 striction and salutary limitation upon corporate powers. 
 Thoy have reduced the price of incorporation to a mere 
 nothing. They have done away with annual taxes. They 
 grant "roving" charters and the tendency is to create 
 **tramp" organizations, without responsibility and with- 
 out protection to the public. This erroneous view of New 
 
342 JAMES B. DILL 
 
 Jersey's corporate policy has had a regrettable influence 
 upon many other states. 
 
 No man can deny the fact that under the laws of New 
 Jersey many corporations are organized whose methods 
 both of organization and subsequent procedure are inde- 
 fensible. 
 
 The very fact that the large and strong companies were 
 organized under New Jersey's laws was the reason why the 
 bubbles and shams sought to be incorporated under the 
 same laws, that they might claim to be similar to the great 
 corporations and might borrow from the association an 
 appearance of strength. 
 
 It must, however, be borne in mind that after their 
 methods have been passed upon by the courts of New Jer- 
 sey, it may appear that the promoters of such corporations 
 cannot justify their position under the New Jersey laws but 
 will be pronounced violators of the very statutes which 
 they assumed would protect them. 
 
 VI. FURTHER LEGISLATION NEEDED. 
 
 It is, however, apparent that certain additional safe- 
 guards for the public are requisite. 
 
 There is today a lack of required publicity. 
 
 If the investor could obtain at the outset as much infor- 
 mation about the make-up of the company when its securi- 
 ties are offered upon the market as is thrust upon these 
 investors when a receiver is appointed, then many so-called 
 industrials would never see the light of day. Could the 
 investor know when the security is first offered to him that 
 out of $50,000,000 of the capital $25,000,000 had already 
 been divided among the promoters, issued for nothing and 
 representing nothing, the promoters' lack of capital capital- 
 ized, such securities would never reach the public. 
 
 Such facts, however, fail to come to the knowledge of 
 the investors until the appointment of a receiver, the promo- 
 
NEW JERSEY'S CORPORATE POLICY 343 
 
 ters having falleu out, or the nianagemont being no longer 
 able to carry the burden of the promoters' creation. 
 
 In order that the industrials shall be and remain invest- 
 ments in the true sense, the requirements of the public as 
 investors must be met under corporation laws. 
 
 AMiat the ])romoters seek is secrecy. 
 
 The i)ublic, as investors, should have a legal right to a 
 reasonable degi'ee of information. 
 
 As a class the promoters demand the privilege of issu- 
 ing millions for nothing; but on the other hand, what the 
 investing public requires and is legally entitled to, is some- 
 thing for a dollar, or somebody responsible for the defi- 
 ciency. 
 
 Power of manipulation, dark-closet division of exorbi- 
 tant percentages of the securities, and, in case of failure, no 
 personal responsibility, are privileges absolutely antago- 
 nistic to the best interests of the industrial situation today. 
 
 It is not only necessary to have such laws that good 
 companies can incorporate imder them, but in the same code 
 you must have such enactments in the shape of ''thou shalt 
 nots" that bad companies dare not incorporate. 
 
 A^I. CONCLUSION. 
 
 A question of interest to the bar of every state is as 
 to the true basis of a state corporation act. We recognize 
 the demands of modem business for a suitable act. We see 
 the trend towards the creation of business companies. We 
 realize that the corporation laws of the last century need 
 remodeling to meet the legitimate requirements of the new 
 centur}'. 
 
 The old theory as to the state's duty in creating cor- 
 porations, that, being creatures of the state, they should be 
 guaranteed by it to the public in all particulars of responsi- 
 bility and management, is being abandoned. 
 
 Tlie modcra and quite opposite theory is that, in the 
 
844 JAMES B. DILL 
 
 absence of fraud in its organization or the conduct of its 
 affairs, an ordinar}- business corporation should be allowed, 
 within limits excluding banking, insurance and quasi-public 
 corporate powers, to do anything that an individual may do. 
 
 The Massachusetts Committee on Corporation Laws in 
 its report (1903) adopted the latter theory. 
 
 When New York's political leaders rejected the Roose- 
 velt Corporation Act of 1900, the state lost her opportunity. 
 
 They misconceived the trend of affairs. 
 
 I am of the opinion that the passage of the Roosevelt 
 Act would have aided greatly in stemming the current which 
 was gradually breaking down salutarj^ restrictions upon 
 corporations and which has since then been moving in in- 
 creasing volume and wdth increasing swiftness — the tend- 
 ency to make corporation laws popular, with a view to se- 
 curing revenue to the state from corporate organizations. 
 
 That state in the future which will secure to itself the 
 best corporations, which will attract incorporated capital as 
 opposed to incorporated wind, will not be the state which 
 sets the standard in laxity, but the state which shall so 
 frame its laws as to conform most closely to the principles 
 of honesty in organization and integrity in management. 
 
CORPORATION REORGANIZATIONS AND 
 RECEIVERSHIPS.* 
 
 BY THOMAS L. GREENE. 
 
 f Formerly President of tlic Audit Company of New York.l 
 
 Altlioiigli as has already boon stated, the corporation 
 fomi is best adapted for those bnsinesses which meet a 
 public demand, -wlioso vohnno of tradinc^ or traffic or man- 
 ufacture is apparently steady, and whose profits under 
 good management may be expected to be reasonably uni- 
 form, and although under such conditions insolvency should 
 be rare, yet incorporated companies at times become bank- 
 rupt — that is, are unable to pay their floating or funded 
 debts. If such corporate insolvencies in any line of busi- 
 ness constitute a larger percentage than is shown by the 
 general average throughout the United States, a percent- 
 age larger either in the ]")roportion of bankrupts to the 
 whole or in the proportion of assets to liabilities, then it is 
 important for the welfare both of investors and of the pub- 
 lic that careful investigation should be made to ascertain 
 the causes of such undue percentages. Perhaps the rea- 
 sons for such largo proportion of bankrupts may lie in 
 the fact that the earnings of the company from some cause 
 have been reduced so fast that the expenses could not corre- 
 spondingly ]ie cut down; or it may be that the capitaliza- 
 tion of the company was in the first place arranged on a 
 false l)asis; or perhaps the failure may have come from 
 a combination of those causes. Sometimes, also, wide- 
 spread commercial disasters, such as tlie failures of crops 
 over a large section of the country, may accoimt for the 
 temporary embarrassment; although even in such a case 
 
 * From the P.rd edition of Corporation Finance. G. P. Putnam's Sons, 
 New York. 
 
346 THOMAS L. GREENE 
 
 the possibility, in a concern whose finances have been con- 
 servatively managed, ought long ago to have been taken 
 into account. 
 
 But from whatever cause arising or whatever the per- 
 centage may be of those companies which have failed to 
 have achieved success, the fact of the inability of any com- 
 pany to pay its debts brings up at once a large number of 
 fijiancial problems of extreme difficulty and delicacy. The 
 affairs of the simple trading company, when forced to suc- 
 cumb, may prove comparatively easy of adjustment; but 
 not so with large companies. Our great railway systems, 
 for example, have grown to their present size by degrees 
 through the construction or absorption into the system of 
 lines or branches once independent, or which may yet be 
 nominally considered so. The credit of such a huge rail- 
 way system is also a matter of growth; but a good credit 
 once attained does not yield easily to the first rumor of 
 disaster. The managers, properly careful for the interest 
 of the shareholders, put the best face upon the declining 
 revenues in the hope that the deficit may be but temporary 
 — and indeed by helping to tide over a period of embarrass- 
 ment through the means of old-established credit, the man- 
 agers of such a system have in many instances really saved 
 the property for the shareholders. In other cases, how- 
 ever, where the evil was too deep-seated to be removed or 
 where the embarrassment continued so long that it could 
 be no longer ignored, the confession of insolvency has found 
 the affairs of the company in a most unfortunate shape. 
 
 The receivers, upon appointment, have been ordered by 
 the court to pay off those back debts which properly 
 should have been discharged at the time of their incurring 
 from current revenues, but which were allowed to accumu- 
 late in order to enable the managers to maintain the ap- 
 pearance of solvency. As these claims are made a first 
 lien upon the property either with or without the issue 
 of receivers' certificates, usually the property must remain 
 
REORGANIZATIONS AND RECEIVERSHIPS 347 
 
 in reccivei*s' liands at least as loug as it may ])0 necossaiy 
 to accumulate from the revenues sums sufficient to provide 
 for these prior claims. If, after a time, it is found that 
 the payment of these claims from revenues is impossible, 
 or where receivers' certificates have been issued for this 
 very purpose and are now outstanding, then these sums 
 must be taken into account by the reorganizers of the com- 
 pany as so much which must be raised by the owners of 
 the property before it can be turned over to them. 
 
 In addition to the sums of money thus directly re- 
 quired, it is almost always found that other cash amounts 
 are also necessary. Since a railway system does not plunge 
 at once into insolvency, it usually finds itself tending in 
 that direction for a longer or shorter time previous to the 
 final confession, and it commonly happens during these 
 months or years when the stress of the circumstances be- 
 gan to bear hard upon them, that the managers have omit- 
 ted to do many things which the business of the company 
 really required. In the case of railways the roadbed may 
 have been long neglected without absolutely going below 
 the standard of safety. Repairs to wooden bridges or 
 trestles have been delayed and renewals of rails and ties 
 have been put off, so that the real requirements of the prop- 
 erty are not revealed until a receivership makes conceal- 
 ment no longer advisable. When that receivership comes 
 and before reorganization plans can be drawn up, the 
 amount of money necessary to be spent in order to make 
 good all depreciation and to render the plant capable of 
 the most economic working must be definitely known. This 
 is the time, too, for an outlook into the future when the 
 possible changes in transportation rates or in the services 
 demanded should be met by some arrangement for grant- 
 ing to the reorganized company certain sums of money 
 year by year for this future use. Altogether the cash re- 
 quirements for the present and for the future constitute 
 sums which must be raised in reorganization either by 
 
S48 THOMAS L. aREENE 
 
 assessments upon the shares and bonds or — what amounts 
 to the same thing — by some arrangement which will allow 
 of a prior mortgage upon the property sufficient to accom- 
 plish these results. Usually, also, it is necessary that the 
 accounts of the defaulting company should be gone over 
 carefully in order that the real earnings of the property, 
 unadulterated through bookkeeping assets or suspense ac- 
 counts or padding of any kind, should be ascertained. 
 
 With these figures before them and with the outlook 
 for business in general and in the section of the country 
 immediately concerned in particular, the banking firm or 
 conunittee is able to determine within reasonable limits 
 what the earning power of the company after reorganiza- 
 tion will be. Here, then, are the elements of the problem 
 at the beginning. A certain amount of cash must be raised 
 to pay off debts and to make good the deficiencies in the 
 depreciation account; allowance must be made for the cash 
 requirements of the future; and finally all the fixed charges 
 of the reorganized company must be brought so far below 
 the assumed earnings as to give to the new bonded capital 
 a good standing and credit at once upon all the exchanges. 
 
 It having been determined to what extent the present 
 bondholders and shareholders must suffer loss in order to 
 bring the capital of the new company within the earning 
 limits at the time of reorganization, the next problem is the 
 division of this loss among the old security holders. This 
 is a task demanding the widest knowledge combined with 
 the best financial judgment. Under our assumption the 
 railway system, now insolvent, is composed of many dif- 
 ferent parts, each having upon it bonds varying in value, 
 in interest charges, and in length of time to maturity, 
 whose liens upon the various properties may also be so 
 interlaced as to make their disentanglement a very diffi- 
 cult thing indeed. Very likely there are prior lien mort- 
 gages upon the older parts of the road on which the interest 
 charges have unquestionably been earned. Where such is 
 
REORGANIZATIONS AND RECEIVERSHIPS 349 
 
 oloarly tlic caso, sncli ])on(ls should not Ix' asked to siir- 
 roiidor any part of their ]irineipal or interest. A funda- 
 mental axiom in corporation finaneierinp^ is that bonds 
 which are imquestionably good shonhl unquestionably be 
 paid. Nothing tends to throw discredit u])on corporation 
 securities so much as a lack of di-scrimination in cases of 
 insolvency between bonds which are good and those which 
 are not. 
 
 Perhaps there is also a first mortgage upon the entire 
 system, whose interest has been earned; if so, the loss should 
 fall upon the junior securities; or perhaps one of the diffi- 
 culties of reorganization begins at this point. It may be 
 that the main line has earned the interest on these first- 
 mortgage bonds, to judge from the statements prepared in 
 the auditor's office; but it is important to inquire whence 
 comes the traffic whose carriage has 3'ielded this profit. 
 There may be branch lines which give to the system so 
 much of its volume of business that without them inter- 
 est on the first-mortgage bonds would not have been 
 earned; it may be that valuable terminals in the large cities 
 are occupied by the company subject to mortgages of their 
 own. 
 
 Or, again, perhaps contracts of various kinds have 
 been entered into with connecting roads whieh on their 
 face arc improfitable, and yet if those contracts were an- 
 nulled the resulting indirect loss to the company might 
 seriously imperil the interest on the first mortgage which 
 we are considering. ^Manifestly, in the face of such compli- 
 cations, it will not do to say that interest on tliese first- 
 mortgage l)onds has been earned and should be paid, while 
 at the same time no allowance is made for interest upon 
 the teraiinal ])onds or branch-line obligations or contracts 
 with connecting lines. If it is a question of division of the 
 losses between them, the exact proportion which each 
 should suffer can only be detennined after a careful search 
 into the whole matter and after a full investigation into 
 
350 THOMAS L. GREENE 
 
 the claims of each one of these from a transportation point 
 of view. 
 
 It is, in a majority of cases, useless for the holders of 
 bonds having a lien upon a specific piece of road to think 
 of foreclosing their mortgage and taking the property cov- 
 ered by it out of the system to make it independent. An 
 exception, of course, must be made in the cases of prop- 
 erty such as a terminal in a large city, which may be es- 
 sential to the business of the defaulting company and yet 
 which may be so situated as to be easily turned over to and 
 used by some other company. In such cases, of course, there 
 is no alternative but to keep such terminals in the system 
 by paying interest upon the bonds; usually the courts are 
 quick to recognize the exigencies of the situation and to 
 authorize the receivers to pay such interest even at the 
 expense of the remaining parts of the trust estate. Usual- 
 ly, however, a piece of property, even though covered by 
 a separate mortgage, finds its chief value as a component 
 part of the system as a whole. The reason for the amalga- 
 mation of separate railways into one system is that the 
 business as a whole may be administered to the best ad- 
 vantage of all. Under these conditions the individuality 
 of any one part of the system is in time lost and cannot be 
 easily regained even under a separate ownership through 
 foreclosure of that particular mortgage. There is some- 
 thing, therefore, beyond mere words in the disinclination 
 so often stated by the courts to allow any ** disintegration 
 of the system," and there is likewise good reason for the 
 further order that at any sale for the purposes of reorgan- 
 ization the whole shall be offered as one parcel. This is 
 the true poHcy, not only from the point of view of the in- 
 vestor, which we have just been considering, but also from 
 that of the public whose facilities for quick and cheap 
 transportation would be seriously interfered with, were an 
 old system allowed to be broken into its separate parts 
 by reason of differences of opinion between the bondhold- 
 
REORGANIZATIONS AND RECEIVERSHIPS 351 
 
 ers as to the values ol' their respective mortgages. The 
 same reasoning with modifieations suited to the circum- 
 stances apijlies to corporations other than railways which 
 have been conducting large business operations. 
 
 Stockholders to whom belong all the profits of the enter- 
 prise should under ordinary circumstances be willing to 
 bear the losses. It is upon this principle that the cash 
 requirements of an insolvent company, which have just 
 been referred to, are usually made up by an assessment 
 upon the shares. But this principle is itself limited by 
 expediency. If, under the influence of impending trouble 
 and actual insolvency, the quotations for the shares on 
 the exchanges have fallen to very low^ figures, a large as- 
 sessment levied upon each share might indeed, if carried 
 out, result in the wiping out of such stock under a reorgan- 
 ization, but would not bring into the treasury of the new- 
 company any cash; the old shareholders would prefer to 
 lose their holdings rather than to pay the assessment de- 
 manded, unless they were convinced that the prices of the 
 new shares upon the exchanges after reorganization would 
 at least be higher than the amount of the assessment. If 
 the shares alone are asked to furnish the money for the 
 cash requirements and at the same time to stand the ])runt 
 of the reorganization generally, the new stock to be given 
 in exchange for the assessment might be of little value. 
 From the nature of the case the equities of a reorganization 
 cannot be proved like a mathematical pro])lem, but are 
 matters of individual judgment; hence able lawyers em- 
 ployed by aggrieved shareholders are often able to bring 
 forward facts and arguments to such an extent as to make 
 doubtful or delay the carrying out of any plan of reorgan- 
 ization to which their clients are unanimously opposed. 
 More than that, the mortgages, under whose terms the 
 bondholders must act in foreclosing, often contain sections 
 whose exact meaning perhaps is doubtful, or whose pro- 
 visions cannot be quickly carried out, offering chances for 
 
352 THOMAS L. GREENE 
 
 long legal delays. It is sometimes possible for tlie share- 
 holders to oppose the foreclosure of a mortgage so skilfully 
 as to make the carrying out a matter of years. For all 
 these reasons it is customary in drawing up plans of re- 
 organization to consult the so-called "rights" of the stock- 
 holder to as great a degree as is consistent with justice to 
 all concerned. 
 
 The practical effect of this small deference to the share- 
 holder is to put a part of the losses under reorganization 
 upon the junior securities; that is, upon those mortgages 
 which of course come ahead of the stock, but whose lien 
 upon the property is subsequent to the older bonds. Per- 
 haps the cash requirements already spoken of may be ar- 
 ranged for by an assessment of several dollars upon each 
 share of stock and also upon the junior bonds. Sometimes 
 when the future looks hopeful, the holders of the senior 
 bonds may be asked to forego their interest for a while or 
 to refund their coupons into a separate loan for which they 
 may receive other securities under the plan. 
 
 In the history of American railwa}^ reorganizations, it 
 has been a common thing to find certain bonds or shares 
 given to the old holders, to represent the cash assessments 
 which they were asked to pay, or the losses in principal 
 or interest to which they were asked to submit. Such a 
 course is justified by business conditions in the United 
 States. In America values are largely determined by ref- 
 erence to the future. Quotations of the corporation stocks 
 or bonds upon the exchanges are governed by two consid- 
 erations — the present earnings and the expectation for the 
 future. Such a method of estimating values is to be ex- 
 pected in a large country not yet fully developed, whose 
 agricultural and mineral possibilities are great, and which 
 on the average is increasing in wealth and in the volume 
 of business year by year. The very pace by which indus- 
 try usually advances leaves the way open for temporary 
 depreciations, and these for a time may curtail business 
 
REORGANIZATIONS AND RECEIVERSHIPS 353 
 
 to such an extent as to leave a railway or other corpora- 
 tion unable to meet its ol)li,i,^ations. If, undcu* these cir- 
 cumstances, reorganization becomes necessary, it is not for- 
 gotten that the future may have in store for the company 
 greater earnings than are now annually being obtained. 
 Hence it is in accordance with business facts that the hold- 
 ers of bonds or shares which, under the stress of present 
 necessity, must sacrifice something, should ask that some 
 evidence of their former claims against the company be 
 granted them. They ask for this evidence so that if the 
 company in future years should earn as much as in times of 
 former prosperity or indeed anything at all beyond the 
 present standard, these old postponed claims may then be- 
 come alive again and be worth something to their holders. 
 Xearly all railway reorganizations recognize the justice of 
 this positi(m, and the plans are arranged accordingly. 
 
 Another reason why the method of giving some evi- 
 dences of inde])tedness in exchange for assessments or bond 
 losses is iDoi3ular, lies in the fact that investment sentiment 
 seems better satisfied where paper of some kind is given 
 to bondholders in return for their sacrifices, than where 
 such sacrifices are demanded without it. This is true even 
 in cases where the intrinsic values of the two pieces of 
 1 taper are no larger than that of one alone would be. But 
 even where intrinsically the same, it is a common expe- 
 rience that the quotations for the two are larger than would 
 be that for one alone. The great majority of mankind 
 are optimists and deal with corporations' shares and se- 
 curities optimistically. The natural hopes of investors, 
 therefore, serve to give to an income bond or a share of 
 stock dependent upon future earnings, a quotable value 
 which through sentiment may be considerably higher than 
 that justified by the present position of the company. 
 
 For these reasons it may be possible in an easily ar- 
 ranged plan of reorganization to give to the holder of a 
 discredited bond a new bond for a part of his claims, and in 
 
 B— 11— 2S 
 
354 THOMAS L. GREENE 
 
 addition an income bond or shares of preferred stock, in 
 such proportion that by selling both new issues the old 
 bondholder may be able to get back his entire investment 
 and really lose nothing. Such a procedure, however, is 
 oftentimes possible only when the capitalization of the new 
 company?" is largely increased. If regard is had to the pres- 
 ent time only and to the demands of the present holders of 
 the bonds of the defaulting company, such a reorganization 
 will be considered a success; and it is not to be denied that 
 the wish to satisfy present demands is legitimate so far as 
 it may be proper. But if we regard the day of reckoning, 
 such a reorganization may not be defensible. The new cap- 
 italization may indeed be made to mature long years hence, 
 but when that maturity arrives and the increased principal 
 must be met, the wrongfulness of a plan which increases the 
 capitalization, even though without an increase of obliga- 
 tory charges at the moment, becomes apparent. And if, 
 meanwhile other disasters should overtake the corpora- 
 tion, the old injudicious arrangement of increased capitali- 
 zation will make it all the more difficult to secure to the 
 company such new money or such concessions as it may 
 need. 
 
 When the holders of discredited bonds are asked to sur- 
 render a part of their principal and to accept a smaller rate 
 of interest, an income bond to represent the losses may be 
 offered to them. To satisfy the conditions of the problem, 
 this bond must be of such a character as to be quoted in the 
 Street at such a figure as will reimburse the old holders for 
 their sacrifices; at the same time, of course, the object of the 
 reorganization must be kept in view — that is, to reduce the 
 fixed charges. To satisfy both these conditions, the income 
 bond must be made contingent upon earnings on the one 
 hand, and on the other must have also such obligatory fea- 
 tures as will commend it to investors. Although these two 
 features are contradictory, such a bond has, in a number of 
 cases, been arranged for in American reorganizations. 
 
REORGANIZATIONS AND RECEIVERSHIPS 355 
 
 Experience lias shown wiiat, indeed, niij^lit have been ex- 
 pected, that snch a form of corporation ('a})ital works out no 
 better in pi'actice tlian in theoiy. On the one side, the 
 liolders of such income or preference bonds are continually 
 clainiinc: that certain profits earned by the railway company 
 should be paid over to them. On the other hand, the prin- 
 cipal being an obligation, these income or preference bonds 
 often stand in the way of proper management of the fi- 
 nances of the company. As every growing system has in- 
 creasing needs, the managers find easy opportunities where 
 the expenditure of a few thousands of dollars would biing 
 a large return in the way of increased traffic or profit; yet 
 they are debarred from borrowing money because the in- 
 come mortgages deny them that privilege. The result of 
 this curious position is that the company does not progress 
 as it ought, the acuteness of the managers being mean- 
 while exercised to devise means whereby the too stringent 
 terms of the income mortgage may be made practically of 
 no effect. For illustration, a company may need larger 
 terminals, and these terminals may be the means of increas- 
 ing the profits which should go toward paying something 
 upon the income bonds. Being, however, unable in its o^vn 
 name to borrow the money to pay for these terminals (be- 
 cause the new mortgage cannot be put ahead of the income 
 bonds), the company may arrange to have them held in 
 another name, meanwhile entering into a contract with the 
 terminal company to pay over to the latter certain sums for 
 the use of the sui)posed terminals. Such a terminal charge 
 per passenger and per ton is agreed upon as will be enough 
 to meet the interest on the new^ terminal bonds; such ter- 
 minal charges being meanwhile added to the working ex- 
 penses of the system. In this way ])ractically the interest 
 on the terminal bonds is paid for by the parent company, 
 although the temis of the income or preferred mortgage 
 would forbid such a thing if attempted directly. All these 
 considerations being taken into account, the quotations for 
 
356 THOMAS L. GREENE 
 
 these income bonds often rule so low upon the stock ex- 
 changes as to make a large issue necessary if the original 
 losses of the bondholders under reorganization are to be 
 thus made up. As a consequence, the capitalization of the 
 new company is much larger than that of the old. 
 
 Preferred stocks given in exchange for the sacrifices of 
 the old bondholders are much better than income bonds 
 from the point of view of good corporation financiering. 
 Preferred shares may thus properly represent deferred 
 claims. There is no peremptory obligation resting upon 
 the company to pay an annual dividend upon these shares, 
 particularly if they are made non-cumulative. To make 
 dividends on preferred shares cumulative is not good policy 
 except in extreme cases, because it lays the shares open in 
 modified degree to the reasoning which has just been ap- 
 plied to the income bonds. Preferred shares, too, have vot- 
 ing power, and their holders, even though small in number, 
 are thus put in the way of defending their own interests in 
 the board of directors or before it. Moreover, while an 
 excessive capitalization represented by shares is an evil and 
 gives rise to some objectionable conditions in our corpora- 
 tion finance, yet it is by no means so dangerous as excessive 
 capital represented by bonds. Altogether, therefore, pre- 
 ferred shares represent deferred claims under reorganiza- 
 tion much better than can income or preference bonds, and 
 in all cases of reorganization should be issued for such pur- 
 poses where the laws of the state will allow of such issue. 
 The issue of preferred shares in exchange for assessments 
 paid by the holders of common stock is often made expedi- 
 ent by the sentimental wish of the assessed shareholder to 
 have some special piece of paper to represent his payments. 
 
 Legally the owner of a single bond is entitled to all the 
 rights and advantages which the terms of the mortgage may 
 give. It is becoming more common, however, to limit the 
 rights of a small minority by modifying somewhat the ex- 
 treme language of the mortgage. Railway mortgages now 
 
I 
 
 REORGANIZATIONS AND RECEIVERSHIPS 357 
 
 usually provide that the trustoos shall take loc^al prorood- 
 in^s, shall declare the principal due and shall ])r()('('('d t<> 
 foreclose, only when a certain percentage of the ])()ndhold- 
 ers request it so to act. Custom yet gives to one half of the 
 bonds outstanding^, or sometimes to a smaller peiventage, 
 the right to demand the satisfaction of their mortgage 
 through the trustee. But the legal right of foreclosure is 
 one thing and the commercial expediency is often quite an- 
 other. A system with a number of different classes of 
 bonds upon it being in difficulties, the holders of some of 
 the junior issues may be unwilling to agree to any plan of 
 reorganization whatever, or may find fault with the pro- 
 portion of new securities to be given them under the adver- 
 tised plan. In either case one half or more of the bond- 
 holders have the power to compel the trustees to begin fore- 
 closure proceedings. If these proceedings are carried 
 through, these same bondholders must be prepared to bid 
 in the property in order to secure their debt. This, in turn, 
 involves "financing" the new company. They must often 
 be prepared to furnish money enough at the sale to pay all 
 the floating and current indebtedness, and, if they would 
 make a success of their new company, they must also be 
 ready to furnish the capital which under our assumed con- 
 ditions the system needs in order to ])e put in good condi- 
 tion and ready for economical working. These two re- 
 quirements may call for so much money that the bondhold- 
 ers may well hesitate ))efore they enter upon such an under- 
 taking. Holders of corporation securities are scattered 
 throughout the country, and ])erhaps many of the bonds are 
 held in Europe. A scattered majority stands rather help- 
 less before such a problem; the trustee will not act unless 
 expenses are guaranteed to it, while no banking house will 
 undertake the formation of a new company unless it sees 
 clearly that the conditions favor success, and unless, too, it 
 has the support of a majority of the mortgage issues. It is 
 customary now for committees to be foi-med to protect the 
 
358 THOMAS L. GREENE 
 
 interests of the various securities involved in the insol- 
 vency. If such committee succeed in getting the greater 
 part of the securities deposited with it, it becomes a factor 
 in the reorganization; yet even when this is the case, such 
 committee may not be willing to furnish the large sums nec- 
 essary to finance the new company in a manner favorable 
 to the particular bonds held by them. 
 
 It will thus be seen that it is better for the bondholders 
 of a bankrupt railway system to accept a plan of reorganiza- 
 tion, if found equitable, rather than to attempt to buy in the 
 property for themselves. If the proposed plan of rehabili- 
 tation is belived by a majority of all bondholders to be un- 
 fair, it will usually fall to the ground through lack of sup- 
 port; that is, a plan, to be carried out successfully, must 
 have the active assistance of a majority of the bondholders 
 given to it through a deposit of bonds of those holders who 
 assent to the plan. No matter how strong the language 
 of the mortgage, the bonds issued under it are worth only 
 what the commercial conditions of the company allow; 
 hence it is better for the holders of defaulted bonds to ac- 
 cept a plan when found upon examination to be equitable, 
 than to insist upon their legal rights, for their bonds are 
 worth only what their proportion of the total value of the 
 company's property comes to; they could not get any more 
 than that proportion even though they insisted upon the full 
 terms of the mortgage. Corporation reorganizations re- 
 solve themselves into commercial problems rather than 
 legal. 
 
 As business conditions change rapidly in a developing 
 country, it frequently happens that a company when in- 
 solvent and about to be reorganized wishes to get rid of 
 certain branches, guaranties, leases, or other contracts 
 which in the course of time may have proven themselves 
 very unprofitable. So long as the corporation is solvent, 
 the question of the justice of living up to its contracts does 
 not arise. When, however, it confesses that it is unable to 
 
REORGANIZATIONS AND RECEIVERSHIPS 359 
 
 pay its debts, then its linaucial rohal)ilitation becomes a 
 question of commercial value, and in this light it is deemed 
 proper for a reorganization committee to plan for a cutting 
 off of those branches, leases, or other contracts which are 
 recognized as burdensome upon the company. Sometimes a 
 company is rehabilitated without a sale of its property at 
 foreclosure. In such happy cases it has been found pos- 
 sible to make such an arrangement among all the bondhold- 
 ers and stockholders as enables the old company to rear- 
 range its mortgages and shares and go on with its business 
 under the existing charter. In cases, however, where un- 
 profitable branch lines have had to be supported on onerous 
 contracts carried out, the determination to relieve the com- 
 pany from these burdens proves a stumbling-block to the 
 easy fonn of rehal)ilitation just referred to; for whenever a 
 company is rehabilitated l)y a change in its financial ar- 
 rangements and proceeds with its business under its old 
 charter, all the contracts, guaranties, and leases which it 
 may once have entered into are kept alive and become 
 claims against the company. Tlie only method of getting rid 
 of such burdensome guaranties or leases is through the 
 foreclosure of some one of the mortgages and a sale of the 
 property and franchises to another company. If there is a 
 charter in existence whose privileges are such as to meet 
 the conditions of the insolvent company, then the property 
 may be sold and conveyed to a company organized Tuider it. 
 If this is not possible, then a new charier must be ol)tained 
 in the state or states concerned. 
 
 It is at this point that new difficulties arise. In many 
 cases the charters under which the insolvent systems are 
 now operating were granted many years ago and contain 
 privileges which could not now be obtained from any legis- 
 lature or from Congress. It may be that the state which 
 originally gave the franchise has, since granting that char- 
 ter, enacted new laws which forbid ])erhaps the very things 
 that the old charter permits. Under these circumstances 
 
360 THOMAS L. GREENE 
 
 the foreclosure of one of the mortgages on the system and 
 the sale of the property to a company formed under a new 
 charter might involve the surrender of so much of the old 
 commercial rights as would render the success of the enter- 
 prise doubtful. Here, again, it may be expedient for the 
 holders of a senior or a junior mortgage to make some con- 
 cessions which will allow of a restoration of the plant into 
 the hands of the original company, rather than to insist 
 upon the carrying out of the provisions of the mortgage, 
 which, though legally clear, are impossible of fulfillment ex- 
 cept at the expense of the holders of the bonds themselves. 
 When systems having old and valuable state or federal 
 charters have also burdensome leases or contracts, the ad- 
 justment becomes one of great difficulty. If the present 
 charter be retained, the onerous contract is still in force 
 even though temporarily disowned by the receivers ; if it is 
 sought to throw off these contracts by a sale to a company 
 newly organized under present laws, an equally large or 
 even larger loss may be entailed. If neither party will 
 yield something under these conditions, the property may 
 stay in the hands of receivers much longer than would be 
 otherwise necessary, and longer too than the courts prefer 
 to keep the control in their possession. If at last neither 
 will yield, it becomes a choice of evils. It may be that dur- 
 ing the period of embarrassment the general business of the 
 company has suffered to such an extent that the senior 
 bonds are affected. It then becomes a question as to whether 
 these senior bonds will foreclose their mortgage and let the 
 property go for what it will bring; in such cases the break- 
 ing up of large and important systems is a thing to be 
 lamented in the interest of the public no less than that of 
 the creditors themselves. 
 
 Before insolvent companies undergo reorganization 
 there is usually a period of receivership. The practice of 
 operating insolvent railways through court oJBficers appoint- 
 ed for the purpose is not yet definitely settled either as to 
 
REORGANIZATIONS AND RECEIVERSHIPS 361 
 
 tlic niotliods of working or as to tlio legal docl j-iiics invohcd, 
 the whole matter being yet in a st^ite of evolution. Tt is the 
 boast of our law that it changes to moot the changing de- 
 mands of connneree as business becomes more conijilex and 
 the rules goveraing it necessarily more involved; so as re- 
 gards railway receiverships our present situation is the re- 
 sult of a compromise between the terms of railway mort- 
 gages and the commercial conditions under which railway 
 operations are carried on. 
 
 The original idea of appointing a receiver to take charge 
 of the property of a firm or individual was that the business 
 might be wound up with as little delay as possible and the 
 assets sold and distributed to the creditors in some equit- 
 able proportion. As corporations became more common, 
 taking the place of firms and individuals, the same idea was 
 applied to them when insolvent. They were placed in the 
 hands of receivers in order that their affairs might 1)0 closed 
 up with the least possible delay by dividing the assets 
 among the creditors in the proportion to which it was sho^^^a 
 they w^ere entitled. It was inevitable that the (question of 
 the proper method of treating insolvency among railway 
 companies should arise. From small beginnings the num- 
 ber of miles of i-ailway in the United States increased rapid- 
 ly until now, judged by the magnitude of the property in- 
 vested and the amount of business done, the railways fonn 
 perhaps our largest industry, certainly one of the most com- 
 ])lex. Through one cause or another it was inevitable that 
 l)ankruptcy should increase among these rail carriers as 
 their mileage increased; and in such cases also it was nat- 
 ural, as in the cases of fiims or small corporations, that re- 
 ceivers should be appointed pending a settlement of the in- 
 solvent debtor's affairs. But here a new question arose. 
 A trading finn or corporation imable to pay its debts could 
 be wound up and its assets distributed to its creditoi-s with- 
 out loss to the community. Other traders could take their 
 places and business would go on as before; but it was other- 
 
362 THOMAS L. GREENE 
 
 wise with the railways. It was quickly seen that great 
 states and sections of states depended upon the continued 
 operation of these railways for the transaction of their 
 everyday business, for supplies of clothing and manufac- 
 tured goods, and even for meat and bread. Wliatever the 
 outcome, the trains must be kept running. Since, in the 
 course of time, local railways have grown into systems, it 
 was found that the interests involved in these systems were 
 so enormous that their combined assets could not be easily 
 sold as one parcel to any one person or company, or sold 
 separately without breaking up the systems. Hence, until 
 the serious question of reorganization or sale was settled, 
 the receivers of these systems must continue to run the 
 trains in the interest of the public. As these necessary ad- 
 justments were often found very complicated, requiring a 
 long time for negotiations and final agreement, the re- 
 ceivers appointed by the courts were placed for the time 
 being in the position of railway managers. They were con- 
 fronted with technical problems of much practical impor- 
 tance. They were required to become familiar with dis- 
 puted questions concerning reasonable rates and their rami- 
 fications. The conflicting claims of cities and towns as to 
 charges which should be relatively fair to each were pressed 
 upon their attention. In short, it was required that re- 
 ceivers should be able to formulate for the operation of 
 the properties in their charge a policy which should be 
 equitable to the capitalists whose money was invested in 
 the road, to all the sections served by the railway, and to 
 the general traveling and shipping public. Needless to say, 
 the success of such a task required men of administrative 
 ability, with the further result that the courts through 
 their appointed officers were obliged to decide upon the 
 details of administration. 
 
 It was the practice at first for receivers to be asked for 
 solely by certain creditors of the company in order that 
 their property might be held together and protected against 
 
REORGANIZATIONS AND RECEIVERSHIPS 363 
 
 the seizure of certain parts of the system hy other creditors 
 which might destroy the vahie of the property as a whole. 
 Usually the corporation appeared before tlic couri in oppo- 
 sition to the motion, so that, if receivers were appointed 
 at all, the court acted upon information broucfht to its 
 knowledge after a severe legal struggle. The idea that the 
 corporation itself could ask for an appointment of a receiver 
 for its own property originated with the late Jay Gould, 
 whose contention in the Wabash cases in this respect was 
 afterwards affirmed by the Supreme Court of the United 
 States, which held that a company could itself ask for the 
 protection of the court if such was for the best interest of 
 all concerned. Under this doctrine few of our large rail- 
 way systems are now placed in any but "friendly" hands. 
 In such cases the matter is all planned out beforehand and 
 the men chosen. Any creditor of the company, friendly 
 to the administration, may allege that the corporation owes 
 him money that it cannot pay, and as every going concern 
 has plenty of creditors in the ordinary course of business, 
 such a convenient creditor is usually not hard to find. To 
 this complaint, usually prepared in secret, some one of the 
 company's officers arranges a reply confessing the truth of 
 the charge. All parties concerned, each with the respective 
 documents, and without notice to the other creditors or to 
 the public, apply to the judge, perhaps at night, who forth- 
 with grants the application and appoints the receivers al- 
 ready arranged for. That this procedure opens the door 
 to the possibility of great abuse of corporate interests needs 
 no argument. That on the whole the plan has worked fair- 
 ly well is owing to the high character of our judiciary and 
 also of the officers in charge of our great corporations. Yet 
 it is not reassuring to holders of stocks, bonds, or floating 
 debt to know that a conspiracy between any small creditor 
 and any one of the principal officers of a corporation may 
 throw the control of the whole property of the company into 
 the hands of the court. Unquestionably, the appointment 
 
364 THOMAS L. GREENS 
 
 of former officers of the company as receivers leads to the 
 charge at times that those who had wrecked the company 
 are still left in power. Moreover, the door is open to 
 abuses, such as the difficulty easily thrown in the way of a 
 thorough investigation into the company's condition, which 
 it may be the wish of the old managers to thwart, but which 
 may be necessary before an equitable plan of reorganiza- 
 tion can be evolved. Yet the affairs of our large corpora- 
 tions have become so complicated that only those long fa- 
 miliar with them are capable of administering them without 
 losses both to owners of the road and to shippers. This 
 business fact has so far controlled the action of the courts 
 in the appointing of old officers of the insolvent corporation 
 as receivers, though usually other men not previously con- 
 nected with the company, but representing important inter- 
 ests as well as the sections through which the road runs, are 
 chosen to serve with them. Laws have been introduced in 
 various states to check the abuses to which the methods of 
 receiverships have given rise, but while these statutes have 
 done good as to certain matters of detail, the commercial 
 facts of which we have spoken have been strong enough 
 thus far to prevent any material modification of the policy. 
 
 The immediate cause of a railway receivership is usually 
 the floating debt. Strictly speaking, the expression *' float- 
 ing debt" means the money borrowed by a company on col- 
 lateral and made payable on demand or within a short time. 
 The term, however, is sometimes used to cover other debts 
 of the corporation, such as for supplies which have been 
 bought but not paid for. A railway which is fairly prosper- 
 ous can arrange to pay its bond interest in a period of de- 
 pression without showing signs of distress. Every large 
 business concern, such as a manufactory, must arrange for a 
 depreciation of plant and machinery before setting aside 
 earnings applicable to interest or dividends. The reason 
 for this is that, were a contrary course to be pursued, the 
 stockholders or bondholders would very shortly find them- 
 
REORGANIZATIONS AND RECEIVERSHIPS 365 
 
 selvt's ill possession of a woi-thloss property. In factcjriesthc 
 ex})('('ted losses from depreciation are usually arranged for 
 by settins^ aside a certain sum of money from the earnings 
 yearly, but the practice of railways is different. It is the 
 custom with them to renew or replace roadbed, track, and 
 equipment from year to year as fast as these deteriorate or 
 become woni out, charging the cost directly to working ex- 
 penses. By these means the whole plant is kept up to its 
 standard at the expense of the earnings, the effect being the 
 same as though specific sums had been set aside from in- 
 come each year. This method of arranging for deprecia- 
 tion allows the railways to vary the amount of replacement 
 from year to year according as the seasons are prosperous or 
 the reverse. In a good year more may be spent upon the 
 roadbed and the track and for the purchase of new equip- 
 ment to replace the old at the cost of working expenses, 
 than perhaps was proportionately required. Then, in poor 
 years, not so much of this sort of work may be done, allow- 
 ing a larger proportion of gross income to be payable to 
 bondholders and stockholders. This saving in the working 
 expenses by a stoppage of repairs to the plant is usually the 
 first resort of the railway manager when pressed for im- 
 mediate money to pay bond interest. Then there are al- 
 ways demands for new capital for improvements necessary 
 to be made by every railway as its traffic increases. Ordina- 
 rily bonds are sold to meet these capital charges. If, be- 
 cause of a lack of confidence on the part of the investing 
 public, or a lack of credit as regards this particular com- 
 pany, such bonds cannot be sold, except perhaps at a great 
 sacrifice, then the management proceed to borrow the nec- 
 essary^ money for these capital improvements and perhaps 
 for the then due bond interest. Usually the com])any must 
 hypothecate with the bankers from whom the money is 
 borrowed, bonds either of the company itself or such as are 
 held in its treasuiy and controlling subsidiary lines impor- 
 tant to tlie integrity of the system, so that the banker's loan 
 
366 THOMAS L. GREENE 
 
 may be fully secured. If matters go from bad to worse, if 
 it appear to the lender that the situation of the company is 
 becoming more and more critical, so that he is beginning 
 to doubt the real value of the collaterals held by him, he 
 then calls for his money, if it is loaned on demand, or gives 
 notice that he will ask for it when the same shortly matures. 
 If the company cannot arrange to borrow the amount from 
 some one else, and if it is confronted with the sale of all its 
 securities at bankrupt prices, the managers may resolve to 
 confess their own insolvency before a public confession is 
 made by the sale of the securities held by the banker. Per- 
 haps, just at this moment, a large amount of interest is due 
 to bondholders. In such a case the railway managers may 
 choose to default on the bond interest and take the money 
 for payment to the floating-debt holders, in order to save 
 for the company the collateral which the bankers may hold, 
 and which may be essential to the control of parts of the 
 system, but which would very likely go for a song if pressed 
 for immediate sale. Wliile, therefore, floating debts do not 
 differ from other obligations of the company except in form, 
 they have come to be recognized in Wall Street as a source 
 of great danger in any period of business depression or lack 
 of credit. If this money borrowed on demand or on short 
 notice can be funded into bonds having years to run, the 
 company cannot suffer through a demand upon it for the 
 principal, but it is safe so long as the interest is promptly 
 paid. This reasoning has led railway companies at times 
 to adopt the plan of selling long-time bonds in order to pay 
 off the floating debt, even though the price received should 
 be far below par. But such a course compels the company 
 to pay a very high rate of interest during the whole life of 
 the bonds and is considered such bad financiering that such 
 sales are taken in Wall Street as an acknowledgment that 
 the company is hard pressed — with results to the credit of 
 the corporation almost as bad as though the distress had 
 been openly acknowledged. Under these circimistances, 
 
REORGANIZATIONS AND RECEIVERSHIPS 367 
 
 ''friendly" rcccivors arc often asked for so that interest 
 may ])e withheld from the ])ondholders and used to take up 
 the obligations of the com])any iniiucdiately pressing, par- 
 ticularly in cases where a failure to meet those obligations 
 would entail severe losses upon the system for all time. 
 
 The court appointing receivers thus asked for usually 
 stipulates that debts incurred in the operation of a road for 
 several months shall be paid by the receivers. At first 
 blush it would appear that such an order entails hardship 
 upon the creditoi-s of the company, yet upon examination 
 it will be found to be equitable. Transportation is con- 
 ducted as a cash business. Travellers and shippers are re- 
 quired to pay their money down before taking their journey 
 or receiving their property. Since a railway must be run 
 in the interest of the general public, and since this involves 
 the theory that its working expenses must be paid, it is clear 
 that the expenses of today are properly chargeable to the 
 gross receipts of today paid in cash by the patrons of the 
 road. But, as we have seen, in periods of distress, the man- 
 agers in order to postpone a confession of bankruptcy in the 
 hopes that the temporary trouble may be tided over, begin 
 to put off payments for wages or for coal, rails, ties, and sup- 
 plies of all descriptions which they may continue to buy, 
 because necessary for the continued operation of the trains. 
 In this way, at the date of appointment of receivers, every 
 bankrupt road has large arrears of wages and accounts to 
 be made up. As these current obligations are really charge- 
 able to the receipts of the several months past, and as these 
 receipts have been taken to pay bond interest or for other 
 purposes in the interest of the bondholders, it is proper that 
 the prior claims for current expenses should be made up 
 from the first receipts of the road under the receivership. 
 If there is any complaint to be made on the part of the bond- 
 holders, it is that tiie knowledge of these facts has not been 
 brought to their attention; but usually in such a matter the 
 managers of the road act in good faith, in the hopes that 
 
368 THOMAS L. GREENE 
 
 better times may enable them to pay up the back debts and 
 save the indirect losses to the bondholders, which a public 
 confession of the real situation would at that time have 
 caused. 
 
 The heavy expenses confronting the receivers at the 
 time of their appointment are met partly from defaulted 
 bond interest and perhaps from receivers' certificates. At 
 first these certificates, generally made a first lien on the 
 property, were authorized very sparingly by the courts and 
 only in cases shown beyond dispute to be necessary. Grad- 
 ually such issues were extended, until the present practice 
 is for authorization of certificates for any purpose w^hich the 
 court may be led to believe is for the ultimate benefit of the 
 road. In this way another mortgage is put ahead of the 
 regular mortgage whose bonds, held by the public, have 
 been supposed and declared to be a prior lien upon the road. 
 The force of circumstances often thus impairs the rights of 
 existing mortgages though these be drawn in strong legal 
 language. The right to. issue receivers' certificates has 
 been, and may be, greatly abused. In one case the expense 
 of operating greatly exceeded the receipts. The property 
 and franchises should have been sold at once so that the 
 first-mortgage bondholders might at least have received the 
 value of the rails and equipment; but the court allowed the 
 receivers to go on running the road until the certificates is- 
 sued to make up the losses amounted to more than the value 
 of the property, the bondholders not getting a cent. Re- 
 ceivers' certificates should be authorized only when a care- 
 ful judgment tempered by conservatism justifies their issue. 
 As just said, the directors, at the first appearance of a de- 
 cline in profits, economize in depreciation expenses, hoping 
 for better times. If the decline continues and a receivership 
 ensues, the passing of the property into the hands of the 
 court is an acknowledgment of facts regarding impairment 
 of income which are true though not before generally 
 known. Hence the issue of receivers' certificates commer- 
 
REORGANIZATIONS AND RECEIVERSHIPS 369 
 
 cially represents the impainnent of income just referred to, 
 ])nt which at the time was not enforced apjainst the bond- 
 holders. Railway niort,e:a,o:es are not sacred because of the 
 strong legal terms in which they are drawn, but are depend- 
 ent upon success in the business of transportation, differ- 
 ing in this respect from real-estate mortgages which rely 
 more upon the prosperity of the whole comnumity. The 
 legal doctrine of certificates is in a state of evolution, with 
 a tendency to approximate its working to the business cir- 
 cumstances. Our practice of railway receiverships is thus 
 a development of our own circumstances and a sort of com- 
 promise between the too strong language of our mortgages 
 and the actual conditions of the business of transportation. 
 
 A receiver piay decline to pay the rentals due to leased 
 lines or the interest owing on guaranteed bonds if these 
 lines are at the time of the receivership unprofitable, no 
 matter how necessary to the parent company these branches 
 may once have been. But the old contracts are still legally 
 in force against the company, and can be thrown off only by 
 a sale of the franchise and property to a ne^v corporation. 
 Such a sale sometimes would involve a forfeiture of valu- 
 able charter rights besides a long legal struggle; and in such 
 reorganizations committees usually try to formulate some 
 plan which shall bring the fixed charges below^ the minimum 
 l^rofits by allotting the necessary losses among all classes of 
 securities in 2:»roportion to their respective values to the 
 system as a whole — a process which does not regi\rd the 
 liens of the mortgages so much as the worth of the lines 
 they cover. But with plans of reorganization, the receiver 
 properly should have nothing to do. 
 
 The legal doctrine and the practice regarding receiver- 
 ships and receivership problems have, in the United States, 
 been developed thus far largely in the affairs of railways. 
 Railways so clearly have public duties to perfonn that it 
 was inevitable that questions regarding their continued op- 
 eration should require settlement. This point once settled, 
 
 B—ll—Zi 
 
370 THOMAS L. GREENE 
 
 matters of detail about the proper working ^YOuld naturally 
 come up for adjustment in the order of their commercial 
 evolution. 
 
 For these reasons we find the custom regarding railway 
 receiverships much in advance of those concerning other 
 corporations. But though these latter lag behind, there 
 are not wanting signs that some of the problems of this 
 character which we are trying to solve in transportation, are 
 in the future to demand consideration in manufacturing. 
 When factories were numerous but small and easily man- 
 aged by an individual or by a firm composed of but few 
 persons, it was not a matter of great public moment wheth- 
 er one or two firms failed. The demand could be easily 
 supplied by the manufacturers still in business and per- 
 haps the factory itself, belonging to the insolvent partners, 
 would be re-opened and run by another firm. The case is 
 altered already, if we have in mind the large corporations 
 formed to do certain manufacturing on an extensive scale, 
 and the point is likely to demand more attention in the 
 future, when, in the probable evolution of things, the great- 
 er part of our manufactured output may be produced by 
 a comparatively few companies having large capital, ex- 
 tensive plants, and the best of appliances — for to such a 
 state of production are we slowly tending. 
 
 Already cases of the insolvency of large manufacturing 
 companies have been before the courts. In appointing re- 
 ceivers, it is now customary in such instances to allow these 
 officers of the courts to continue the business. Like rail- 
 ways, these large corporations cannot very well stop work- 
 ing. Not only are large bodies of laboring men dependent 
 for bread upon this continued operation, but concerns 
 throughout the coimtry would be embarrassed if their 
 orders, perhaps half executed, should not be completed at 
 the appointed time. 
 
 Under our assumptions, it might not be possible for the 
 customers of the corporation to obtain the required articles 
 
REORGANIZATIONS AND RECEIVERSHIPS 371 
 
 from any other source of supply, and certainly not in tinic 
 to go ahead with their own plans — plans which it not car- 
 ried out might cause financial embarrassment to them also 
 and to others. In short, the larger the com])any, the more 
 complete the producing organization, the more important 
 to the community is its continued operation. We have 
 heard complaints from solvent com])anies or firms that the 
 competition of factories in the hands of receivers was un- 
 fair to them, exactly as in the case of railways; but the 
 growing interdependence of trade and commerce leaves no 
 other alternative. 
 
 This being so, the discussion just had on the commer- 
 cial facts underlying railway receiverships has a bearing 
 upon the immediate and future problems of manufactur- 
 ing or trading corporations. This is all the more true be- 
 cause these latter are now issuing mortgages after the man- 
 ner of transportation companies. In the present customs 
 about railway receiverships and their rapid evolution under 
 the stress of actual conditions, and in the philosophy which 
 seems to underlie those customs, we may catch glimpses 
 of the probable experience awaiting the community if large 
 business corporations are to do the most of our manufac- 
 turing, and if the managers of those companies should re- 
 peat the financial blunders or frauds which appear in our 
 past railway history, or if commercial disaster should com- 
 pel a readjustment of capital. 
 
DISSOLUTION OF A PRIVATE CORPORATION.* 
 
 BY WILLIAM ALLEN WOOD. 
 
 There are five ways in which a corporation may cease 
 to exist. If it is created to exist for a given term of years, 
 named in the charter, it dies at the end of that time. Sec- 
 ond, the charter may be repealed by the legislature of the 
 state which granted it, if the statute contains a clause, 
 which most statutes do, providing that it may be repealed 
 at any time. Third, the charter may be surrendered vol- 
 untarily by the corporation, with the consent of the state. 
 Fourth, the charter may be forfeited for non-user or for 
 some wrongful act which has been done by the corporation 
 and for which it is called to account by the attorney-gen- 
 eral of the state. A court decides whether there is a for- 
 feiture. Fifth, when all the members of the corporation 
 die, so there are no stockholders left, it is generally consid- 
 ered that the corporation ceases to exist. This is the law, 
 notwithstanding the fact that the corporation is distinct 
 from its members. The last form of extinction is almost 
 inconceivable in a moneyed corporation with transferable 
 shares since, when a stockholder dies, his shares pass to his 
 heirs. There is, of course, no such thing as a resignation 
 from a moneyed corporation, and no way for a stockholder 
 to cease to be a stockholder except through a transfer of 
 his stock or the death of the corporation. Whether a con- 
 solidation of two companies effects a dissolution depends 
 upon the tenns of the statute under which the consolidation 
 is effected. One corporation may absorb another by pur- 
 chasing, under statutory authority, all the shares, fran- 
 
 * From Modern Business Corporations, by William Allen Wood and Louis 
 jB. Ewbank, Indianapolis. The Bobbs-Merrill Co. 
 
 37^ 
 
DISSOLUTION OF PRIVATE CORPORATION 373 
 
 chiscs, and proix'rties of anotlior corporation, and tliis may 
 work a practical dissolution of the soiling coi']^orati(>ii. 
 
 A corporation is not dissolved by a sale and assignment 
 of all its corporate propei-ty; by discontimiin-- business; by 
 failure to elect officers and directors; by the accpiisition hy 
 one person of all the stock; or by insolvency. 
 
 ]\lany corporations are not successful, and fail in their 
 purpose. Having neither sufficient property or debts to 
 make a formal dissolution necessary, they are simply aban- 
 doned by their officer and stockholders. Unless the char- 
 ter is caused to l)e f<ufeited by the state, the corporation is 
 not dissolved until the time limit expires. Failure to pay 
 taxes due to the state is cause for forfeiture of charter. An 
 inactive corporation may be revived at any time under such 
 a running charter by paying delinquent taxes and other 
 debts. Sometimes persons intending to carry on the same 
 line of business as that authorized under a charter owned 
 by an inactive corporation will buy the stock of the inactive 
 corporation at a nominal price, which is less, usually, than 
 it would take to buy a new charter, and will conduct their 
 business under that charter's authority. Care nuist he ex- 
 ercised that they are not thereby acquiring liabilities of 
 which they had no knowledge. When a corporation be- 
 comes insolvent, proper legal proceedings may bring about 
 the appointment of a receiver, who will settle the affairs of 
 the corporation and usually dissolve it. 
 
 Voluntary dissolution may be brought about by vote of a 
 given fraction (usually two-thirds) or all of the stockhold- 
 ers of a corporation, accoi-ding to statutory provisions. In 
 the absence of statutory provisions, a dissolution may usu- 
 ally be brought about by consent of a majority of the stock- 
 holders and a decree of a court of competent jurisdiction; 
 or it may cei-tainly be brought about by consent of all the 
 stockholders. ]\[ost states give the procedure for liringing 
 about voluntaiy dissoluti<^n, and this procedure should be 
 carefullv followed so that all the stockholdei-s and creditors 
 
374 
 
 WILLIAM ALLEN WOOD 
 
 may be bound by the action taken. The usual process is for 
 the directors to call a stockholders' meeting, advertise it 
 and notify the stockholders, and give evidence to the state 
 that proper consent has been given to the dissolution. The 
 directors are then given the power to pay creditors and to 
 divide the remaining property among the stockholders. It 
 has been held that a dissolution of a corporation does not 
 destroy the obligation of a corporation's contracts, as the 
 equitable rights of creditors survive the act of dissolution 
 and attach to the assets and property of the corporation in 
 the hands of its liquidators. 
 
DOCUMENTS ILLUSTRATING BUSINESS 
 ORGANIZATION. 
 
 I. ARTICLES OF COPARTNERSHIP.* 
 (A)— SIMPLE ARTICLES OF COPARTNERSHIP. 
 
 Edward T. Craven and Milton Noble, both of the City of 
 Rochester, New York, hereby mutually agree to become 
 partners under the firm name of "Craven & Noble" to con- 
 duct the trade and business of sign-painting in the said city 
 for the period of two years from date. 
 
 The said Craven invests his stock of paints, bnishes and 
 other material, estimated to be worth two hundred dollars, 
 and tx.e said Noble invests two hundred dollars in cash. 
 
 Both partners shall give their entire time and shall share 
 losses and gains equally. 
 
 All amounts earned or received by either partner for 
 work, materials or anything pertaining to the business, 
 shall be deposited in the Guardian Trust Company of Roch- 
 ester in the name of both partners, and shall be checked 
 out as needed for expenses and supplies, by the signatures of 
 both partners, and an equal amount shall be drawn each 
 Monday morning for each partner for personal expenses, 
 l)ut a balance of two hundred dollars shall always be kept 
 and held. 
 
 "When the firm shall l)e dissolved the material on hand 
 shall be divided equally and all debts shall ])e ])aid from the 
 money in bank, after which the balance shall be divided 
 equally between the partners. 
 
 * From Conyngton"s Manual of Partnership Relations. Ronald Press, 
 New York. 
 
 375 
 
376 BUSINESS ORGANIZATION DOCUMENTS 
 
 Witness our hands and seals this 12th day of October, 
 
 1905. 
 
 Edward T. Craven. (L.S.) 
 Milton Noble. (L.S.) 
 
 Attest, 
 
 Mark Gorham. 
 
 (B)— ARTICLES FOR MANUFACTURING BUSINESS. 
 
 THESE ARTICLES OF COPARTNERSHIP made 
 and entered into as of the eighth day of April, nineteen 
 hundred and five, by and between Henry Gardes, of the 
 City, County and State of New York, party of the first part, 
 Harvey Wilson, of the same place, party of the second part, 
 and James Haskins, of the same place, party of the third 
 part, WITNESS: 
 
 I. The parties hereto for and in consideration oi the 
 mutual provisions and agreements hereinafter contained, 
 and the sum of one dollar each to the other in hand paid, 
 the receipt w^hereof is hereby acknowledged, have agreed to 
 and do by these presents become copartners together in the 
 business of manufacturing and selling disinfectants and 
 disinfecting apparatus, and in buying, selling, renting and 
 vending all sorts of goods, wares and merchandise to said 
 business belonging or pertaining, and to conduct said busi- 
 ness in the City of New York, and in such other place or 
 places as may be expedient and beneficial. 
 
 II. The firm name and style of said business shall be 
 the WILSON MANUFACTURING COMPANY. Said 
 copartnership shall commence on the day of the date hereof 
 and shall continue for ten years thereafter. 
 
 III. Each party hereto, hereby contributes to the said 
 business all his right, title and interest in and to the assets 
 of the former firm known as and by the same name, which 
 was organized under Articles of Agreement bearing date 
 the twenty-third day of November, eighteen hundred and 
 ninety-six", by and between the parties hereto, together with 
 one Henry Caldwell and which was this day dissolved by 
 
ARTICLES OF COPARTNERSHIP 377 
 
 niiitiial cniisciit, and tlio intorcst of said Caldwell assii^nicd 
 to tlu' ])arti('s hereto, it beiiii^ understood and agreed that 
 tlie eontribntion of each is in the sanu^ ])i-o|)ortion as tho 
 intei'est of each a])])ears n])on the books of the said dissolved 
 firm, saving that tlie prolits thereof shall be eai'ried to the 
 credit of each from the inception of such former partnership 
 in accordance \vith the ])rovisions of Paragraph V below. 
 For the purpose of ascertaining such res})eetive interests, an 
 account shall be stated between the parties hereto in re- 
 s]iect to said dissolved firm, and any amount due from 
 Henry Caldwell, the retiring partner, as well as any amount 
 paid to him by said firm to induce his retirement, shall be 
 charged to the profit and loss account. 
 
 IV. The said parties of the second and third parts each 
 hereby agrees to contnbute all his business skill and ex- 
 ]ierience, and each shall give his whole time and attention 
 exclusively to the affairs of said business and shall not be 
 engaged, employed or interested in any other business 
 whatever. 
 
 The party of the second part is to more especially at- 
 tend to the manufacturing department and office work, and 
 the party of the third part is to more especially attend to 
 the sales department, but in general one of said parties of 
 the second and third parts shall at all times attend to such 
 duties as shall best serve the interests of said business. 
 
 V. Tlie profits and losses of said business shall be 
 borne and divided between the parties hereto as follows: 
 Tlie ]\arty of the second part, forty-two and one-half per 
 cent thereof; the party of the third part, forty-two and one- 
 half per cent thereof; the party of the first part, fifteen per 
 cent thereof. 
 
 VI. Anything to the contrary hereinbefore notwith- 
 standing, said pai-ty of the first part shall have the privilege 
 on the first day of January, nineteen hundred and six: (1) 
 To withdraw from said business; (2) to continue the same 
 upon the terms hereinbefore provided; (3) to contribute 
 the further sum of twenty-five hundred dollars t*^ said busi- 
 ness (for which he shall thereupon be credited on the books 
 of said firm). Upon such additional contribution of twenty- 
 five hundred dollars, the said party of the first part shall be 
 allowed interest at the rate of five per cent per annum, to 
 be chai'ged as an expense to the said business. 
 
378 BUSINESS ORGANIZATION DOCUMENTS 
 
 Said party of the first part shall notify in writing the 
 parties hereto on or before the first day of December, 1905, 
 of his choice of the above three options, and in the eA^ent of 
 his election to contribute the further sum of twenty-five 
 hundred dollars, he thereupon shall also contribute his skill 
 and experience and devote all his time and attention exclu- 
 sively to the said business and shall not be engaged, em- 
 ployed or interested in any other business whatsoever, and 
 the branch thereof to which he shall more especially attend 
 shall be the selling of goods, the management of said office 
 and the financial work of the said firm. 
 
 In the event of his election to so contribute said sum 
 of twenty-five hundred dollars upon the terms hereinbefore 
 stated, then instead of the profits and losses being borne and 
 divided as provided in the previous paragraph, the same, 
 shall, from and after the first day of January, 1906, be borne 
 and divided between the parties hereto, share and share 
 alike. 
 
 In the event of his election to withdraw from said firm, 
 an accounting shall be had on Janusury first, nineteen hun- 
 dred and six, between the parties hereto, and he shall there- 
 upon be paid in full the amount which shall appear due to 
 him upon such accounting, but the copartnership shall be 
 continued between the other parties hereto upon the same 
 terms as in this contract provided, saving that the liability 
 and benefit of the purchase of the interest of said party of 
 the first part shall be divided equally between said parties 
 of the second and third parts. 
 
 VII. Each of the parties of the second and third parts 
 hereto shall be entitled to draw weekly during the contin- 
 uance of this copartnership, as follows: Party of the sec- 
 ond part, thirty-five dollars per week; party of the third 
 part, twenty-five dollars per week; to be charged to the per- 
 sonal accounts of the parties drawing the same. 
 
 In the event of the marriage of the party of the third 
 part, he shall be entitled thereafter to draw weekly an ad- 
 ditional sum of ten dollars, to be charged to his personal 
 account. 
 
 Tlie party of the first part in the event of his further con- 
 tribution of the further sum of twenty-five hundred dollars 
 upon the first day of January, nineteen hundred and six, 
 upon the terms above specified, shall be entitled on and after 
 
ARTICLES OF COPARTNERSHIP 379 
 
 that day to draw weekly duiiiiL!,- tlic coiiliimancc of this 
 copartnership the sum of thirty-live dollars per week, to 
 be charged to his personal account. 
 
 It is understood and agreed that no further sum or sums 
 shall be drawn by either of the ])arties hereto without the 
 Avritten consent ot* the others having first been obtained, ex- 
 cepting as provided in Paragraph XI herein. 
 
 VIII. There shall be kept and had at the place of busi- 
 ness of the said copartners at all times during the continu- 
 ance of this copartnership true, just and accurate books of 
 account of said firm wherein shall be entered and set down 
 trulv and correctly and properly, as well all money by said 
 copartners or either of them received, paid, laid out and 
 expended in and about their said business, as also all mer- 
 chandise by them or either of them bought or sold by rea- 
 son or on account of said business, and all other matters and 
 things whatsoever to the said business and the manage- 
 ment therof in any wise belonging, which said books shall 
 at all reasonable times be open to the use and inspection of 
 either of said copartners, so that either of them may have 
 free access thereto without any interruption or hindrance 
 of the other, and none of said books nor any papers or writ- 
 ing whatsoever belonging to said firm, shall be removed 
 from the place of business. 
 
 IX. The said parties hereby further mutually agree to 
 and with each other that during the continuance of the said 
 copartnership neither of them shall nor will make, accept 
 nor endorse any note, bill, cheque, draft or other commercial 
 paper in his own or in said firm name, for the accommoda- 
 tion or 1)enefit of any person or pei^sons, whomsoever, or in 
 said name or names enter into any l)ond, undertaking, guar- 
 anty or otherwise incur lia])ility on his own behalf or on 
 behalf of said firm, for the accommodation or benefit of any 
 person or persons whomsoever, without the consent in wiit- 
 ing of the other parties to this agreement. 
 
 X. All notes, cheques, or other commercial paper shall, 
 during the continuance of this agreement, require the sig- 
 nature of the party of the second ])art and at least one other 
 menil)er of said copartnership, and in case of the death of 
 said partner of the second part, then the signature of the 
 survivors shall suffice. 
 
 XI. It is further agreed that said copartners shall on 
 
380 BUSINESS ORGANIZATION DOCUMENTS 
 
 the first day of January, in each year hereafter, during the 
 continuance of this agreement, or oftener if necessary, 
 make, yield and render each to the other a just, true and 
 perfect inventory or account of all profits and increase by 
 them or either of them made in their said business and of all 
 loss by them or either of them sustained in their said co- 
 partnership business. Also all payments, receipts, dis- 
 bursements and all other things by them or either of them 
 received, made, disbursed, acted, done or suffered in their 
 said business. Upon said annual account each of said 
 parties shall pay and bear his just share of such rents, ex- 
 penses and losses as may be made as aforesaid, and should 
 there have been any profits in said business over and above 
 rents, expenses and losses his just share thereof shall be as- 
 certained and of said share he shall then bo entitled to 
 withdraw for his own use the equal one-third part and the 
 remaining two-thirds shall be placed to his credit and shall 
 not be subject to withdrawal until the end or sooner ter- 
 mination of this copartnership, unless otherwise consented 
 to in writing by the other copartners. 
 
 XII. If at any time hereafter and before the accounts 
 between the parties concerning the said copartnership shaU 
 be finally settled and closed, any dispute or difference shall 
 arise between the parties hereto, concerning the true con- 
 struction of anything in these presents, or any accounts to 
 be stated or settled in pursuance hereof, or the valuation of 
 the assets, or anything relating to the partnership or the 
 concerns thereof, or out of the acts or omissions of either 
 party to this agreement, then and so often as the same shall 
 happen, all such matters in difference shall be submitted 
 and referred to the award and determination of five arbi- 
 trators, to be chosen one by each of the parties to this 
 agreement, and the fourth and fifth arbitrators shall be 
 chosen by the three chosen by the parties hereto, and the 
 decision and aAvard of an}^ three of the five arbitrators in 
 writing shall be binding and final between the parties to 
 this agreement, and shall be carried out and perfomied by 
 them. 
 
 XIII. On the dissolution of this copartnership a final 
 accounting shall be had concerning all things comiected with 
 the business, and after pa}anent of all lawful debts of said 
 firm and the repayment of the contribution of said party. 
 
ARTICLES OF COPARTNERSHIP 381 
 
 of tlio first part to said finn, all and cvciy tlio assets of said 
 firm sliall be rodnood to inonoy and tlic pi'occods divided in 
 pro])ortioii to the interest of the parties hereto, as shown 
 by the books of said firm. 
 
 It is expressly understood and agreed that in case such 
 copartnership is dissolved before the expiration of the time 
 herein fixed, then and in that event, said party of the sec- 
 ond i)art u})on such dissolution shall be entitled to a further 
 credit of seven hundred and fifty dollars on the l)ooks of said 
 firm, as an additional consideration for his contribution to 
 the capital therof. 
 
 XrV. In the event of the death of either of the said 
 parties hereto before the time herein fixed for the dissolu- 
 tion of said copartnership, such copartnershi]) shall never- 
 theless be continued between the survivincf parties hereto 
 upon the same terms. And it is further agreed that the 
 legal representative of said decedent shall succeed to all 
 the rights and benefits of said decedent, and that said co- 
 partnership shall be continued with said re]n'esentative of 
 said decedent, if he so elects, in the latter's stead, upon 
 the same terms as hereinbefore provided, saving that said 
 representative of said decedent shall be relieved from any 
 contribution in lieu of the services of said decedent, and 
 that the share of the profits and losses of such representa- 
 tive shall be reduced one-half, and the shares of the surviv- 
 ors equally increased to the extent of such one-half, and 
 further the weekly drawings of such representative of 
 such decedent shall be reduced one-half. 
 
 It is also understood and agreed that in case of the death 
 of either of the parties hereto, before the time herein fixed 
 for the dissolution of said copartnership, the representative 
 of said decedent, in the event of his election not to continue 
 the same as in the last ]^aragraph provided, shall neverthe- 
 less not be entitled to withdraw the shai-e of said decedent 
 from such co])artnei"shii), if solvent, until the expiration of 
 six months after such death, and in that meantime, the rep- 
 resentative of such decedent shall be entitled to and bear 
 an amount equal to one-half of the profits and losses said 
 decedent would have been entitled to and home if living, 
 and interest upon the share of said decedent from th(» time 
 of his death mitil such payment, at the rate of five per cent 
 pcT- annunu The representative of such decedent shall. 
 
382 BUSINESS ORGANIZATION DOCUMENTS 
 
 notify in writing tlie surviving partners of his election 
 under the above provisions within sixty days after such 
 decease — otherwise he shall be deemed to elect to withdraw 
 the shares of such decedent. 
 
 XV. It is also expressly agreed that a waiver by either 
 of the parties hereto of any breach of any covenant, agree- 
 ment or condition of tliis instrument shall not bar his right 
 to avail himself of any subsequent breach of any such cove- 
 nant, agreement or condition. 
 
 IN WITNESS WHEREOF, the parties to these pres- 
 ents have hereunto set their hands and seals as of the 
 day and year first above written. 
 
 Henry Gardes 
 Harvey Wilson 
 James Haskins 
 Sealed and delivered 
 in the presence of 
 
 Jasper Freeman. 
 
 STATE OF NEW YORK ) 
 
 )ss.: 
 City and County of New York ) 
 
 On this 13th day of April, 1905, before me personally 
 came Henry Gardes, Harvey Wilson and James Haskins, 
 to me known and known to me to be the individuals des- 
 cribed in and who executed the foregoing instrument and 
 they duly and severally acknowledged to me that they ex- 
 ecuted the same. 
 
 Wells H. Harris, 
 
 Notary Public in and 
 for New York County. 
 
11. CONTRACTS. 
 
 (A)— GENERAL CON^M^^C^T TO FOR^I A 
 CORPORATION.* 
 
 This Ac^rocmcnt made this first day of November, A. D., 
 1909, by and ])et\v('eii the undersigned, John Brown, Wil- 
 liam Burbank, Edward Cunningham and Raymond Wil- 
 liams, all of the City of Chicago and State of Illinois. 
 
 Witnesseth, That in consideration of the mutual under- 
 takings and agreements of the parties hereto, as hereinafter 
 set forth, and in further consideration of the sum of one 
 dollar by each of the said parties to the other in hand paid 
 (at the time of the execution hereof), the receipt of which 
 is hereby severally acknowledged, the said parties to this 
 contract hereby agree by and among themselves and \\ith 
 each other as follows, to-wit: 
 
 First, That a corporation shall be formed by us under 
 the laws of Illinois substantially as follows: 
 
 (a) The name thereof to be the Perfect Automobile 
 Company. 
 
 (b) The capital stock of said corporation to be One 
 Hundred Thousand ($100,000.00) Dollars, divided into one 
 thousand (1,000) shares of One Hundred ($100.00) Dollai-s 
 each, said stock to be all Common Stock of unifomi char- 
 acter and usual fonn. 
 
 (c) The purpose of said corporation to be substantial- 
 ly for the manufacture and sale of automobiles and their 
 parts. 
 
 (d) Said corporation shall have a Board of Directors 
 consisting of five in number, who shall all be stockholders 
 of record at the time of their election. 
 
 ♦From Frank's Science of Organization and Business Development. 
 
 383 
 
384 BUSINESS ORGANIZATION DOCUMENTS 
 
 (e) The officers of said corporation shall be a Presi- 
 dent, Vice-President, Secretary, Treasurer and General 
 Manager. 
 
 (f) The location of the principal office to be at Chi- 
 cago. 
 
 (g) The duration of said corporation to be 99 years. 
 Second, We hereby agree with each other, and the one 
 
 with the other, that we will take the number of shares of 
 the capital stock of said corporation set opposite our res- 
 pective names hereunto subscribed, and will pay to the 
 commissioners duly appointed by the Secretary of State of 
 Illinois in that behajf, fifty (50%) per cent of the par value 
 of the said shares so subscribed by us respectively at the 
 time of holding the first meeting of the said subscribers 
 to elect a Board of Directors for said corporation; and we 
 further agree to pay the balance of our said subscriptions 
 whenever called upon so to do by the Board of Directors of 
 said corporation, after the same shall be formed. 
 
 Third, We further nominate, constitute and appoint, 
 
 (^ ) j^g Q-^^Y (attorney or) agent, and the 
 
 agent (or attorney) of the said corporation so to be formed, 
 to create or cause to be created the said corporation in 
 accordance with the laws of Illinois and this agreement, 
 and to do and perform all things necessary to bring said 
 corporation into legal existence; and we further author- 
 ize and empower our said agent (or attorney) to draw on 
 the funds in the hands of the legally constituted officers of 
 agents of said corporation, for the necessary expenses at- 
 tending said incorporation, and we further agree that any 
 and all contracts which our said (attorney or) agent may 
 make in such matter shall be binding upon said corporation 
 and also upon us jointly and severally. 
 
 In Witness Whereof, we, the undersigned, hereby sev- 
 erally bind ourselves, our heirs, executors and administra- 
 tors. 
 
PROMOTER'S CONTRACTS 
 
 385 
 
 N'amc 
 
 Address 
 
 Shares 
 
 Amount 
 
 (B)— PRO:^rOTER'S CONTRACT.* 
 
 Wliereas, the undersigned subscribers contemplate the 
 organization of a corporation under the laws of the State 
 
 (or teiTitory) of , to be knowm by the 
 
 name of . /. , or by such other 
 
 name as the subscribing stockholders therein may adopt, 
 
 having an authorized capital stock of $ , 
 
 divided into shares of $ each, for the 
 
 purpose of (state object of corporation briefly). 
 
 It is hereby agreed by and between said subscribers and 
 (promoter's name) : 
 
 (1) That each of said subscribei^ will take the amount 
 of stock in said coi-poration set opposite his name and pay 
 for the same according to the terais of a subscription con- 
 tract this day executed by them. 
 
 (2) That said (promoter's name) has heretofore done 
 work and perfonned services of great value in preparing 
 for the organization of said corporation and securing sub- 
 scriptions to its capital stock, and is to hereafter perform 
 additional sen'ices in perfecting its organization and secur- 
 ing bona fide sul)Scriptious to the cajiital stock of said cor- 
 poration aggregating (aside from the stock taken by tlx* 
 
 subscribers hereto) the sum of $ , or such pari 
 
 thereof as the subscribing stockholders may deem neces- 
 sary to dispose of. 
 
 * From ^^odern Business Corporations, by Wm. Allen Wood and L. B. Ew- 
 bank. The Bobbs-Merrill Co. 
 B — 11—26 
 
386 BUSINESS ORGANIZATION DOCUMENTS 
 
 (3) Said (promoter's name) shall have days 
 
 in which to secure subscriptions for the aforesaid $ 
 
 of capital stock of said company, and if he has failed to do 
 so at the end of that time the subscribers, at their option, 
 may extend his authority, or may recall it, and may, if they 
 
 so elect, subscribe for the remaining portion of said $ 
 
 of capital stock which then remains unsubscribed for, or in- 
 duce others to take it, or abandon the formation of said 
 corporation. 
 
 (4) Upon the incorporation of said proposed com- 
 pany there shall be issued to said (promoter's name), or to 
 any person designated by him, by indorsement on this 
 agreement, in pa\Tnent for his services in effecting such in- 
 corporation and securing the aforesaid subscriptions to the 
 
 capital stock as above provided, shares of the 
 
 capital stock of said corporation. 
 
 Provided, That if said (promoter's name) shall have 
 failed to secure bona fide subscriptions to said capital stock 
 
 in the full amount of $ , there shall be issued to him 
 
 only such proportion of shares of stock as the cap- 
 ital stock for which he has obtained subscriptions is of 
 $ , the whole amount for which he hereby under- 
 takes to solicit subscriptions. 
 
 Provided, further, That if said company be incorporat- 
 ed before the time allowed said (promoter's name) for ob- 
 taining subscriptions has expired and said (promoter's 
 name) shall thereafter, under the terms of this contract 
 secure additional bona fide subscriptions to the capital stock 
 of said company, as above provided, shares of stock shall 
 be issued within thirty days after the said time allowed for 
 obtaining subscriptions has expired to (promoter's name), 
 or to his assignee, as above provided, in the proportion of 
 
 one share of stock for each $ of capital stock for 
 
 which subscriptions are so secured by him. 
 
 In Witness Whereof the said subscribers have hereunto 
 attached their names and designated the number of shares 
 
UNDERWRITING AGREEMENTS 387 
 
 taken l)y each of them, and said (promoter's name) has 
 
 agreed to the above terms. 
 
 Shares 
 
 I agree to the above terms. 
 
 (Signed by promoter). 
 
 (C)_UNDERWRITIXG AGREE:\IEXT. 
 THE UNITED STATES SHIPBUILDIXG CO:\IPANY. 
 
 A coi-poration to be organized under the laws of the State 
 of New Jersey, either by that or some similar name, pro- 
 poses to acquire the plants and equipment of the following 
 concerns, or their capital stock, free from any liens: 
 
 The Union Iron Works, San Francisco, California. 
 
 The Bath Iron Works, Limited, and The Hyde Wind- 
 lass Company, Bath, Maine. 
 
 The Crescent Shipyard and The Samuel L. :sroore & 
 Sons Co., Elizabethport, New Jersey. 
 
 The Eastern Shipbuilding Company, New London, 
 
 Conn. 
 
 The Harlan & Ilollingsworth Co., Wilmington, Dela- 
 ware. 
 
 The Cauda Manufacturing Company, Carteret, New 
 
 Jersev. 
 
 Underwriting Agreement. 
 
 For $9,000,000 Series A First Mortgage, Five Per Cent 
 Sinking Fund, Gold Bonds, due 1932, part of an authorized 
 issue of $16,000,000 Bonds of $1,000 each, $5,500,000 being 
 withdrawn from public issue for disposal under the Ven- 
 dor's and Subscribers' Contracts, and $1,500,000 being Re- 
 served in the Treasury of the Company. Additional Bonds 
 
388 BUSINESS ORGANIZATION DOCUMENTS 
 
 may be issued only for the purpose of acquiring Additional 
 Plants and Equipment and for Improvements and Better- 
 ments, upon such Terms and Conditions as shall be Ap- 
 proved by the Holders of a Majority of the Bonds under 
 the Present Issue Outstanding at the Time of such Ap- 
 proval. 
 
 We, the undersigned, each for himself, with The Mer- 
 cantile Trust Company, for itself and for the United States 
 Shipbuilding Company, and to and with each other, agree 
 to subscribe to, receive and pay for the amount of five per 
 cent first mortgage, sinking fund, gold bonds of the United 
 States Shipbuilding Company of one thousand dollars 
 each, set opposite our respective signatures hereto, at the 
 price of $900 for each bond, 25 per cent to be paid upon 
 allotment and the balance upon the demand of The Mer- 
 cantile Trust Company. 
 
 We further agree to receive and pay for any smaller 
 amount than that subscribed for which may be allotted to 
 us respectively. 
 
 The conditions of this underwriting agreement are as 
 follows : 
 
 (1) That this agreement shall not be binding upon 
 the undersigned unless the entire amount of $9,000,000 of 
 bonds shall have been underwritten. 
 
 (2) That within such reasonable time as shall be fixed 
 by The Mercantile Trust Company the said $9,000,000 of 
 bonds, less any amount withdra^^^l by the underwriters, as 
 hereinafter set forth, will be offered to the public, through 
 such banker or bankers or brokers as shall be designated 
 by The Mercantile Trust Company, for subscription at not 
 less than 95 per cent. 
 
 (3) With the consent of The Mercantile Tmst Com- 
 pany, any other concern may be included in this combina- 
 
UNDERWRITING AGREEMENTS 389 
 
 tion, or others sn])stitiito(l therefor, provided the working 
 effieiency or values are not lessened or impaired. 
 
 (4) That, if the amount of honds suhseribed and paid 
 for upon sueh public issues be at least equal to the amount 
 of bonds so offered to the public, then all liability under 
 this agreement shall cease. 
 
 (5) That, in case the amount of bonds subscri])ed for 
 upon such public offering shall be less than the total amount 
 of bonds so offered to the public, or in case the bonds sub- 
 scribed for upon such public issue shall not be paid for to 
 an amount equal, at the rate of 95 per cent, to the total of 
 such jniblic offering, then such deficiency in subscriptions 
 and payments will, u])on the demand of The Mercantile 
 Trust Company, be made good by the subscribers hereto 
 in the manner aforesaid, ]>n> rafa in the proportion their 
 subscriptions for bonds not withdrawn by them from public 
 issue bear to the total amount of bonds so offered to the 
 public. 
 
 (6) That each underwriter shall receive in preferred 
 and common stock of the United States Shipbuilding Com- 
 pany 25 per cent of the par value of the bonds hereby 
 underwritten in each kind of stock, and also that all the 
 proceeds, not to exceed 5 per cent, realized from the sale of 
 the bonds at public issue in excess of 90 per cent, after de- 
 ducting issue expenses, shall belong to the underwriters. 
 
 (7) That any imderwriter shall have the option of 
 withdrawing from the public issue any of the ])onds hereby 
 underwritten by him, provided that he notify The Mer- 
 cantile Trust Company, five days prior to the date fixed for 
 the public issue, that he elects to purchase said bonds, pro- 
 vided that, in the proportion of the l)onds so purchased, he 
 waives his said right to participate in the r-nsh proceeds 
 realized from the public issue. 
 
 (8) That no underwriter shall sell or offer for sale 
 the bonds so purchased, nor any of the bonus shares he re- 
 
390 BUSINESS ORGANIZATION DOCUMENTS 
 
 ceives, until twelve months after the date of payment, 
 without the consent of The Mercantile Trust Company. 
 
 New York, April 19, 1902. 
 
 Name Address Bonds Underwritten. 
 
III. CORPORATION ACTS. 
 
 (A)— EXTRACTS FROM THE ILLINOIS ACT. 
 
 AN ACT covcerning Corporations. [Approved April 18, 
 1872; in force July 1, 1872; and amendments thereto in 
 force July 1, 1905.] 
 
 Section 1. Be it enacted hy the People of the State of 
 Illinois, represented in the General Assembly: That cor- 
 porations may be formed in the manner provided by this act, 
 for any lawful purpose except banking, insurance, real es- 
 tate, brokerage, the operation of railroads and the business 
 of loaning money: Provided, that horse and dummy rail- 
 roads, and organizations for the purchase and sale of real 
 estate, for burial pui-poses only, may be organized and con- 
 ducted under the provisions of this act: And, provided, 
 further, that corporations formed for the purpose of con- 
 structing railroad bridges shall not be held to be railroad 
 coi-porations. [As amended by act approved April 19, 
 1879; in force July 1, 1879.] 
 
 § 2. Whenever any number of persons not less than 
 three, nor more than seven, shall propose to form a corpora- 
 tion under this act, they shall make a statement to that ef- 
 fect under their hands and duly acknowledged before some 
 officer in the manner provided for the acknowledgment of 
 deeds, setting forth the name of the proposed corporation, 
 the object for which it is to be formed, its capital stock, the 
 number of shares of which such stock shall consist, the loca- 
 tion of the principal office and the duration of the corpora- 
 tion, not to exceed ninety-nine years, which statement shall 
 be filed in the office of the Secretary of State. If the object 
 for which said corporation is proposed to be organized is 
 
 391 
 
392 BUSINESS ORGANIZATION DOCUMENTS 
 
 clearly and definitely stated, and is a lawful object, the Sec- 
 retary of State shall thereupon issue to such persons a 
 license as commissioners to open books for subscription to 
 the capital stock of said corporation at such times and 
 places as they may determine ; but no license shall be issued 
 to two companies having the same or a similar name, nor 
 shall any foreign corporation having the same or a similar 
 name as any domestic corporation be admitted to this State 
 under any foreign corporation law and no domestic corpora- 
 tion shall hereafter be organized with the same or a similar 
 name as any foreign corporation previously admitted to 
 do business in this State. Upon the filing of any statement 
 with the Secretary of State for the purpose of obtaining 
 a license to incorporate, he may propound such interroga- 
 tories as he shall deem necessary to ascertain the true ob- 
 ject: Provided, that the Attorney-General may file a bill 
 in chancery in the name of the People of the State of Ill- 
 inois, against any corporation authorized to confer degrees, 
 diplomas or other certificate or certificates of qualification 
 in the science of medicine, pharmacy or dentistry which 
 conducts a fraudulent business or abuses, misuses or vio- 
 lates the terms of its charter, in any court having jurisdic- 
 tion of the corporation and subject-matter of such bill, for 
 an injunction to restrain said corporation from conducting 
 its business fradulently or abusing, misusing or violating 
 the terms of its charter and also for the dissolution of said 
 corporation, and thereupon it shall be the duty of the 
 court in which said bill is filed to grant such injunction and 
 to hear and determine the same as in other cases in chan- 
 cery: And provided, further, that this act shall apply to 
 schools, colleges or universities which now are, or may here- 
 after be licensed in this State, notwithstanding any pro- 
 visions that may exist in their charters. [As amended by 
 act approved May 16, 1905; in force July 1, 1905.] 
 
 § 3. As soon as may be, after the capital stock shall 
 be fully subscribed, the commissioners shall convene a meet- 
 
CORPORATION ACTS 393 
 
 ing of the subscribers^ for the purpose of elerting rlirectors 
 or mauacfors, and the transaction of such other })nsiness as 
 shall come before them. Notice thereof shall be given hy 
 depositing in the postoffice, properly addressed to each sub- 
 scriber, at least ten days before the time fixed, a written 
 or printed notice, statiuf]: the object, time and place of such 
 meeting. In all elections for directors or managei's of cor- 
 porations organized under this act, every subscriber or 
 stockholder shall have the right to vote in person, or by 
 proxy, for the niunber of shares owned or subscribed by 
 him, for as many persons as there are directors or managers 
 to be elected, or to cumulate such shares and give one candi- 
 date as many votes as the number of directors or managers 
 multiplied by the number of his shares of stock shall equal, 
 or to distribute them on the same principle among as many 
 candidates as he shall think fit; and such directors or man- 
 agers shall not be elected in any other manner. It shall be 
 lawful for any such corporation, by resolution of the stock- 
 holdei*s, to divide its board of directors or managers into 
 three classes, numbered consecut' /ely, the tenu of office of 
 the first class to expire on the uay of the annual election 
 of said company then next ensuing; the second class one 
 year thereafter; and the third class two years thereafter. 
 At each annual election, after such classification, the stock- 
 holders of such company shall elect, for a term of three 
 years, a number of directors or managers equal to the num- 
 ber in the class whose tenn expires on the day of such 
 election, all other vacancies to be filled in accordance with 
 the by-laws of the corporation. 
 
 § 4. The commissioners shall make a full report of 
 their proceedings, including therein a copy of the notice 
 provided for in the foregoing section, a copy of the subscrip- 
 tion list, a statement of the amount of the capital, not less 
 than one-half actually paid in, the amount of such capital 
 not paid in, what disposition has been made of stock sub- 
 scribed and not paid, and if any proportion of the capital 
 
394 BUSINESS ORGANIZATION DOCUMENTS 
 
 has been paid in property, tlie same shall be appraised by 
 said commissioners and they shall report the fair cash 
 value thereof; the names of the directors or managers elect- 
 ed and their respective tenns of office, which report shall be 
 sworn to by at least a majority of the commissioners and 
 shall be filed in the office of the Secretary of State. The 
 Secretary of State shall thereupon issue a certificate of the 
 complete organization of the corporation, making a part 
 thereof a copy of all the papers filed in his office in and about 
 the organization of the corporation, and duly authenticated 
 under his hand and seal of State, and the same shall be re- 
 corded in a book for that purpose, in the office of the re- 
 corder of deeds of the county where the principal office of 
 such company is located. Upon the recording of the said 
 copy, the corporation shall be deemed fully organized and 
 may proceed to business. Unless such company shall be 
 organized and shall proceed to business as provided in this 
 act within two years after the date of such license, then such 
 license shall be deemed revoked, and all proceedings there- 
 under void. [As amended by act approved May 16, 1905; 
 in force July 1, 1905.] 
 
 § 5. Corporations formed under this act shall be bodies 
 corporate and politic for the period for which they are or- 
 ganized; may sue and be sued; may have a common seal 
 which they may alter or renew at pleasure ; may ovm, pos- 
 sess and enjoy so much real and personal estate as shall be 
 necessary for the transaction of their business, and may 
 sell and dispose of the same when not required for the uses 
 of the corporation. They may borrow money at legal rates of 
 interest, and pledge their property, both real and personal, 
 to secure the payment thereof; and may have and exercise 
 all the powers necessary and requisite to carry into effect 
 the objects for which they may be formed: Provided, how- 
 ever, that all real estate, so acquired in satisfaction of any 
 liability or indebtedness, unless the same may be necessary 
 and suitable for the business of such corporation, shall be 
 
CORPORATION ACTS 395 
 
 offered at public auction at least ouce every year, at the 
 door of the court house of the county wherein the same be 
 situated, or on the premises to be sold, after giving notice 
 thereof for at least four consecutive weeks in some news- 
 paper of general circulation published in said county; and 
 if there be no such newspaper pul)lished therein, then in 
 the nearest adjacent county where such newspaper is pul)- 
 lished; and said real estate shall be sold whenever the price 
 offered for it is not less than the claim of such coiT)oration, 
 including all interests, costs, and other expense: And, pro- 
 vided, further, that in case such corporation shall not, with- 
 in such period of five years, sell such land, either at public or 
 private sale as aforesaid, it shall be the duty of the State's 
 attorney to proceed by information, in the name of the Peo- 
 ple of the State of Illinois, against such corporation, in the 
 circuit court of the county within which such land, so neg- 
 lected to be sold, shall be situated, and such court shall have 
 jurisdiction to hear and determine the fact, and to order the 
 sale of such land or real estate at such time and place sub- 
 ject to such rules as the court shall establish. The court 
 shall tax as the fees of the State's attorney such sum as shall 
 be reasonable ; and the proceeds of such sale, after deduct- 
 ing the said fees and costs of proceeding, shall be paid over 
 to such corporation. The provisions of this section shall 
 apply to and be binding upon all corporations now exist- 
 ing by virtue of any special charter granted by this State. 
 [As amended by act approved June 5, 1889; in force July 
 1, 1889.] 
 
 § 6. The corporate powers shall be exercised by a 
 board of directors or managers. Provided, the number of 
 directors or managers shall not be increased or dhninished, 
 or their term of office changed, without the consent of the 
 owners of a majority of the shares of stock. The officers of 
 the company shall consist of a president,secretary andtreas- 
 urer, and such other officers and agents as shall be deter- 
 mined by the directors or managei"s, and the directors or 
 
396 BUSINESS ORGANIZATION DOCUMENTS 
 
 managers may adopt by-laws for the government of the of- 
 ficers and affairs of the company: Provided, they are not 
 inconsistent ^Yith the laws of this State. The directors or 
 managers ma}^ require of the officers and agents bonds, with 
 such sureties and conditions as they shall deem proper and 
 may remove any officers when the interest of the corpora- 
 tion shall require. The officers shall hold their respective 
 offices for the period provided by the by-laws. 
 
 § 7. The shares of stock shall be not less than ten nor 
 more than one hundred dollars each, and shall be deemed 
 personal property, and transferable as such in the manner 
 provided by the by-laws, and subscriptions therefor shall 
 be made payable to the corporation, and shall be payable in 
 such installments and at such time or times as shall be de- 
 termined by the directors or managers, and an action may 
 be maintained in the name of the corporation to recover 
 an}" installment which shall remain due and unpaid for the 
 period of twenty days after personal demand therefor, or, 
 in case where personal demand is not made, within thirty 
 days after a written or printed demand has been deposited 
 in the jDost office properly addressed to the post-office ad- 
 dress of the stockholder. The directors may, by by-laws, 
 prescribe other penalties for a failure to pay the install- 
 ments that may from time to time become due, but no 
 penalty working a forfeiture of stock, or of the amounts 
 paid thereon shall be declared as against any estate before 
 distribution shall have been made or against any stock- 
 holder before demand shall have been made for the 
 amount due thereon, either in person or by a written or 
 printed notice duly mailed to the proper address of such 
 stockholder at least thirty days prior to the time when such 
 forfeiture is to take effect: Provided, that proceeds of 
 said sale over and above the amount due on said shares shall 
 be paid to the delinquent stockholder. 
 
 § 8. Every assignment or transfer of stocks on which 
 there remains any portion unpaid shall be recorded in the 
 
CORPORATION ACTS 397 
 
 office of the recorder of deeds of the county within wliicli 
 the ])rincipal office is h)cated, and each stockhohler shall 
 be liable for the debts of the cori)oration to the extent of 
 the amount that may be unpaid upon the stock held by 
 him, to be collected in the manner herein provided. No as- 
 signor of stocks shall be released from any such indebted- 
 ness by reason of any assignment of his stock, but shall re- 
 main liable therefor, jointl.y with the assignee, until the 
 said stock be fully paid. Whenever any action is brought 
 to recover any indebtedness, against the corporation, it 
 shall be competent to proceed against any one or more 
 stockholders at the same time to the extent of the balance 
 unpaid by such stockholders upon the stock owned by them, 
 respectively, whether called in or not, as in cases of garnish- 
 ment. Ever}' assignee or transferee of stock shall be liable 
 to the company for the amount unpaid thereon, to the extent 
 and in the same manner as if he had been the original sub- 
 scriber. 
 
 § 9. The General Assembly shall, at all times, have 
 power to prescribe such regulations and provisions as it 
 may deem advisable, which regulations and provisions shall 
 be binding on any and all corporations foiTned under the 
 provisions of this act: And, provided, further, that this 
 act shall not be held to revive or extend any private char- 
 ter or law heretofore granted or passed concerning any cor- 
 poration. 
 
 § 10. All corporations organized under this law, whose 
 powere may have expired by limitation or otherwise, shall 
 continue their corporate capacity during the tenn of two 
 years for the purpose only of collecting the debts due said 
 corporation and selling and conveying the property and ef- 
 fects thereof. 
 
 § 11. Such corporations shall use their respective 
 names for the pur])oses aforesaid, and shall be capa])le of 
 prosecuting an<l defending all suits in law or equity. 
 
 § 12. The dissolution, for any cause whatever, of any 
 
398 BUSINESS ORGANIZATION DOCUMENTS 
 
 corporation created as aforesaid, shall not take away or im- 
 pair any remedy given against such corporation, its stock- 
 holders or officers, for any liabilities incurred previous to 
 its dissolution. 
 
 § 13. It shall be the duty of the directors or trustees 
 of every stock corporation to cause to be kept at its princi- 
 pal office or place of business in this State, correct books of 
 account of all its business, and every stockholder in such 
 corporation shall have the right at all reasonable times, by 
 himself or by his attorney, to examine the records and books 
 of account of the corporation. 
 
 § 14. A failure to elect directors, trustees, or officers in 
 lieu of trustees, on the day named and designated in the 
 by-laws, or on the day for which notice was given for elec- 
 tion, shall not have the effect of dissolving the corporation; 
 but such election may be held at any time after proper 
 notice. 
 
 § 15. All assessments or installments of the stock of 
 any stock corporation shall be levied by the directors in ac- 
 cordance with the provisions of the by-laws, but any as- 
 sessment or installment required to be paid shall be levied 
 pro rata upon all the shares of such stock. 
 
 § 16. If the indebtedness of any stock corporation shall 
 exceed the amount of its capital stock, the directors and of- 
 ficers of such corporation assenting thereto, shall be per- 
 sonally and individually liable for such excess to the cred- 
 itors of such corporation. 
 
 § 17. The president, secretary or treasurer of every 
 stock corporation, shall annually, within twenty days from 
 the first day of December, make a statement in writing, set- 
 ting forth a description of all real estate to which title was 
 acquired in securing any debt or liability due such corpora- 
 tion, together with the time of acquiring title thereto; 
 which statement shall be verified by the oath or affirmation 
 of such president, secretary or treasurer, and be recorded in 
 
CORPORATION ACTS 399 
 
 the office of the recorder of the county, and fded in the of- 
 fice of the Secretary of State. 
 
 § 18. If any person or persons, being or pretending to 
 be, an officer or agent or board of directors of any stock 
 corporation, or pretended stock corporation, shall assume 
 to exercise corporate powers; or use the name of any such 
 corporation, or pretended corporation, without complying 
 with the provisions of this act, before all stock named in 
 the articles of incorporation shall be subscribed in good 
 faith, then they shall be jointly and severally liable for all 
 debts and liabilities made by them and contracted in the 
 name of such corporation or pretended corporation. 
 
 § 19. If the directors or other officers or agents of any 
 stock corporation shall declare and pay any dividend when 
 such corporation is insolvent, or any dividend the payment 
 of which would render it insolvent, or which would dimin- 
 ish the amount of its capital stock, all directors, officers or 
 agents assenting thereto shall be jointly and severally li- 
 able for all the debts of such corporation then existing, and 
 for all that shall thereafter be contracted while they shall, 
 respectively, continue in office. 
 
 § 20. The by-laws of every corporation shall provide 
 for the calling of meetings of the directors, trustees, or 
 other officers corresponding to trustees; and when all such 
 officers shall be present at any meeting, however called or 
 notified, or shall sign a written consent thereto on the rec- 
 ord of such meeting, the acts of such meeting shall be as 
 valid as if legally called and notified: Provided, that the 
 action of any meeting held beyond the limits of this State, 
 shall be void, unless such meeting was authorized, or its 
 acts ratified by a vote of two-thirds of the directors, trus- 
 tees, or officers corresponding to trustees, at a regular 
 meeting. 
 
 § 21. If any certified report or statement made, or 
 public notice given by the officers or any corporation, shall 
 be false in any material representation, aU the officers who 
 
400 BUSINESS ORGANIZATION DOCUMENTS 
 
 shall have signed the same, knowing it to be false, shall be 
 jointly and severally liable for all damages arising there- 
 from. 
 
 § 22. The stockholders of any stock corporation, own- 
 ing two-thirds of the stock in such corporation, upon which 
 all assessments have been fully paid up, may call a meet- 
 ing of the stockholders of such corporation by signing a call 
 therefor w^th their proper names, stating the number of 
 shares held by each and filing the same with the president or 
 secretary of such corporation and publishing the same in a 
 newspaper in this State where the principal office of such 
 corporation is kept, and at the seat of government, for 
 three successive weeks prior to the time fixed for holding 
 such meeting, and mailing a copy thereof to each of the di- 
 rectors of said corporation at his usual place of abode. And 
 the secretary of such corporation shall enter such call upon 
 the records thereof, and the fact of such publication, and 
 mailing such notice, giving the name of such paper, with the 
 dates and places of publication which shall be prima facie 
 evidence thereof. 
 
 § 23. No person holding stock in any corporation as 
 executor, administrator, conservator, guardian or trustee, 
 and no person holding such stock as collateral security, 
 shall be personally subject to any liability as stockholder 
 of such corporation; but the person pledging such stock 
 shall be considered as holding the same and shall be liable 
 as a stockholder accordingly, and the estate and funds in 
 the hands of such executor, administrator, conservator, 
 guardian or trustee, shall be liable in like manner and to the 
 same extent as the testator or intestate, or the ward or 
 person interested in such trust fund, would have been if he 
 had been living and had been competent to act and held the 
 stock in his own name. 
 
 § 24. Every executor, administrator, guardian or trus- 
 tee shall represent the stock in his hands at all meetings of 
 any stock corporation, and may vote accordingly as a stock- 
 
CORPORATION ACTS 401 
 
 holder, and ovorv person who shall pledge his stock may, 
 nevertheless, represent the same at all meetings, and may 
 vote aecordingly as a stoekholdc^r. 
 
 § 25. If any corporation, or its authorized agents, shall 
 do or refrain from doing any act which shall subject it to a 
 forfeiture of its charter or corporate powers, or shall allow 
 any execution or decree of any court of record for a pay- 
 ment of money, after demand made by the officer to be re- 
 turned "no property found," or to remain unsatisfied for 
 not less than ten days after such demand, or shall dissolve 
 ov cease doing business, leaving debts unpaid, suits in 
 equity may be brought against all persons who were stock- 
 holders at the time, or liable in any way for the debts of 
 the corporation by joining the corporation in such suit; and 
 each stockholder may be required to pay his pro rata share 
 of such debts or liabilities, to the extent of the unpaid por- 
 tion of his stock, after exhausting the assets of such cor- 
 poration, and if any stockholder shall not have property 
 enough to satisfy his portion of such debts or liabilities, 
 then the amount shall be divided equally among all the re- 
 maining solvent stockholders; and courts of equity shall 
 have full power, on good cause shown, to dissolve or close 
 up the business of any corporation, to appoint a receiver 
 therefor who shall have authority, by the name of the re- 
 ceiver of such corporation (giving the name), to sue in all 
 courts, and do all things necessary to closing up its affairs 
 as commanded by the decree of such court. Said receiver 
 shall be in all cases a resident of the State of Illinois, and 
 shall be required to enter into bonds, payable to the people 
 of the State of Illinois, for the use of the ]iarties inter- 
 ested, in such penalty and with such securities as the court 
 may, in the decree or order appointing the same, require. 
 In all cases of suits for or against such receiver or the cor- 
 poration of which he may be receiver, writs may issue in 
 favor of such receiver or corporation, or against him or it, 
 from the county where the cause of action accrued to the 
 
 B— II— 26 
 
402 BUSINESS ORaANIZATION DOCUMENTS 
 
 sheriff of any county in this State for service. [As amend- 
 ed by act approved May 22, 1877; in force July 1, 1877.] 
 
 § 26. Foreign corporations, and the officers and agents 
 thereof, doing business in this State, shall be subjected to 
 all the liabilities, restrictions and duties that are or may be 
 imposed upon corporations of like character organized 
 under the general laws of this State, and shall have no 
 other or greater powers. And no foreign or domestic cor- 
 poration established or maintained in any way for the pe- 
 cuniary profit of its stockholders or members, shall purchase 
 or hold real estate in this State except as provided for in 
 this act. 
 
 § 27. The certified copy of any articles of incorpora- 
 tion, and changes thereof, together with all indorsements 
 thereon, under the great seal of the State of Illinois, shall 
 be taken and received in all courts and places as prima facie 
 evidence of the facts therein stated. 
 
 § 28. Nothing in this act shall be construed to allow 
 the construction or operation of any street railroad in any 
 city, town or incorporated village, without the consent of 
 the local authorities thereof. 
 
 § 28J. It shall be unlawful for the Secretary of State 
 to issue a license for any person or persons to incorporate, 
 under the name of any heretofore existing corporation or- 
 ganized under any general law of this State, until the ex- 
 piration of 30 days from and after the expiration of the ex- 
 istence of such corporation: Provided, that the corporation 
 enjoying such name shall have the exclusive privilege of be- 
 coming incorporated under the same name at any time 
 within the said 30 days, according to the provisions of the 
 act to which this is an amendment. [Added by act ap- 
 proved June 16, 1887; in force July 1, 1887.] 
 
CORPORATION ACTS 403 
 
 (B)— THE PROPOSED NEW YORK BUSINESS 
 COMPANIES' ACT: 1900/ 
 
 1. Title. 
 
 Section 1. This act may be cited as the New York Busi- 
 ness Companies' Act: 1900. 
 
 § 2. Every corporation organized under this act shall 
 print immediately below its name on its letter heads and 
 other business papers the words "Organized under the New 
 York Business Companies' Act: 1900." 
 
 2. Powers and Purposes. 
 
 § 3. Every corporation organized under this act has 
 power: 
 
 1. To have succession by its corporate name for the 
 period specified in its certificate of incorporation. 
 
 2. To have and use a common seal, and to alter the same 
 at pleasure. 
 
 3. To sue and be sued. 
 
 4. To acquire by grant, gift, purchase, device or bequest, 
 to hold, use, mortgage, pledge and to dispose of any prop- 
 erty, real or personal, and any rights or claims thereupon, 
 therein or thereto, by any legal title to the same extent 
 that a natural person might or could do. 
 
 5. To contract, incur obligations and bind others in its 
 favor to the same extent and in the same manner that a 
 natural person might do. 
 
 6. To appoint such officers and agents as its business 
 shall require, and to fix their compensation. 
 
 7. To make by-laws not inconsistent with law for the 
 management of its property, the regulation of its affairs. 
 
 ♦The New York Business Companies' Act. lOOn, was drafted by a com- 
 mission, composed of men exceptionally well fitted for the work, appointed by 
 Theodore Roosevelt soon after his election as governor of New York. This 
 act, although a model in every important feature, failed of passage in the legis- 
 lature, as stated in Judge Dill's address on "Some Phases of New Jersey's 
 Corporate Policy," pages 321-344. 
 
404 BUSINESS ORGANIZATION DOCUMENTS 
 
 the transfer of its stock, and the calling of meetings of its 
 members. 
 
 8. To do business in any other state or states, in the 
 District of Columbia, in sluj territory or dependency of the 
 United States, or in any foreign country. It may have 
 one or more offices Avithin or without the State of New 
 York, and may purchase or otherwise legally acquire, hold, 
 use, mortgage, and otherwise pledge and convey real and 
 personal property out of the state to the same extent as 
 an individual might do, subject always to the laws of such 
 state or territory; provided that such powers are included 
 within the provisions of the certificate of incorporation. 
 
 9. To wind up its affairs voluntarily and dissolve itself 
 in the manner hereafter mentioned. 
 
 § 4. No corporation shall possess or exercise the above- 
 mentioned or any other corporate powers, except such inci- 
 dental powers as shall be necessary to the exercise of its 
 powers above mentioned unless they are contained in the 
 certificate of incorporation. 
 
 § 5. No corporation created or to be created under the 
 provisions of this act shall by any implication or construc- 
 tion be deemed to possess the power of carrying on the 
 business of receiving deposits of money or of doing a bank- 
 ing or insurance business; nor shall any such corporation 
 adopt as a part of its name the w^ords, *'bank," "trust," 
 or ''trust company," "savings," "investment," "insur- 
 ance," or "assurance," "loan," or "syndicate." 
 
 § 6. Upon executing, recording and filing a certificate 
 of incorporation pursuant to the provisions of this act, 
 three or more persons may become a corporation for any 
 lawful purpose or purposes, other than a moneyed corpora- 
 tion or a corporation provided for by the banking, the in- 
 surance, the railroad and the transportation corporation 
 laws. It shall be lawful to form a corporation hereunder 
 for the purpose of acting as a registration company, which 
 may serve as the registered agent, as hereinafter provided, 
 
CORPORATION ACTS 405 
 
 of companies organized under this act, siil)jeet to all tlic 
 obligations imposed therein. 
 
 3. Registered Office and Agent. 
 
 v^ 7. Every corporation organized under this act sliall 
 have and keep continuously a registered oiifice in this state, 
 and an agent in charge thereof. The name of the corpo 
 ration shall be conspicuously displayed at the entrance to 
 such office, and the address of the office shall be printed 
 upon all letter heads used by the corporation. This office 
 must be kept open regularly during ordinary business 
 hours and the agent must be present to perform the duties 
 required. 
 
 § 8. In the registered office in charge of its registered 
 agent must be kept the stock book and a transfer book of 
 the corporation, written up to date, open to the inspec- 
 tion of all bona fide stockholders, and ready to be used for 
 the transfer of stock. 
 
 § 9. The registered office of any domestic corporation 
 shall be deemed its post-office address and that of its officers, 
 directors and stockholders, and whenever under this act 
 notice is required to l^e given to the corporation, its officers, 
 directors or stockholders other than notices of meetings 
 such notice sent to tlie registered office shall be sufficient, 
 unless another address is specially mentioned. 
 
 § 10. Even' certificate of incorporation and every cer- 
 tificate, report or statement required by this act to be made 
 to any officer or department of this state, or required to 
 be published, or required to be filed or recorded by any 
 corporation, shall, in addition to the other matters required 
 by law, set forth the location, town or city, street and num- 
 ber, if number there be, of its registered office in this state, 
 together with the name of the agent therein, upon whom 
 process against the corporation may be served. No certifi- 
 cate, statement or report of companies organized under 
 this act shall be received, filed or recorded by any officer 
 
406 BUSINESS ORaANIZATION DOCUMENTS 
 
 of this state or in any office in this state unless the same 
 shall comply with the foregoing. 
 
 § 11. The board of directors of any corporation or- 
 ganized under this act may change the location of the regis- 
 tered office of such corporation within the state to any 
 other place within this state by resolution adopted at a 
 regular or special meeting of such board by the votes of 
 at least two-thirds of the members thereof. Upon the 
 adoption of a resolution as aforesaid, a copy thereof, signed 
 by the president and secretary of such corporation, and 
 sealed with its corporate seal, shall be filed in the office 
 of the secretary of state. For filing the said certificate the 
 secretary of state shall charge a fee of five dollars. 
 
 § 12. Any corporation may have one or more transfer 
 offices within or without the State of New York and may 
 transfer stock therein, provided that it shall always keep 
 its stock book and a transfer book at its registered office 
 hereinbefore referred to. 
 
 § 13. Every stock transfer made, whether in the reg- 
 istered office or elsewhere, shall be recorded and entered 
 in the stock books of the said corporation; and the record 
 of such transfers as are not made in the registered office 
 shall be sent by mail to the registered office in the State 
 of New York within two days after the transfer is made. 
 Upon receipt thereof at the registered office, they shall be 
 entered upon the stock books, so that such books shall at 
 all times present a complete record of the stockholders 
 with their addresses other than the registered office and 
 their holdings, including the number and kind of shares 
 held by them, w^hich record shall be at all times during 
 business hours open to the inspection of any bona fide stock- 
 holder. 
 
 § 14. Each corporation shall upon its organization ap- 
 point and name in its articles of incorporation an agent 
 to be knowra as its registered agent. Such agent so ap- 
 pointed shall sign every certificate of incorporation, and 
 
CORPORATION ACTS 407 
 
 shall, after his designation, be held, to all intents and pur- 
 poses, and for all the objects specified in this act, the agent 
 of the company, until he shall have resigned and his resig- 
 nation shall have been filed in the ollice of the secretary 
 of state, or until the corporation shall have designated 
 another agent in his place and stead and filed such designa- 
 tion in said office. Such agent so appointed shall be either 
 a male resident of the State of New York, of full age, or 
 a domestic corporation organized under and pursuant to 
 the terms of this act, and duly authorized thereto by its 
 certificate of incorporation. 
 
 § 15. Every registered agent shall, during the month 
 of April of each year, file a statement as of the first of 
 April, under oath, with the secretary of state of New York 
 which shall specify: 
 
 1. The names of the corporations for which he is the 
 registered agent. 
 
 2. Whether such corporations have or have not made 
 their annual report, as required by sections one hundred 
 eight and one hundred nine of this act. 
 
 3. AVhether the names of these corporations have been 
 at all times displayed before their registered office as re- 
 quired by section seven. 
 
 4. Whether the provisions of this act in sections eight 
 and thirteen, regarding the keeping and inspection of stock 
 and transfer books, have been fully complied with. 
 
 Such report shall be verified by the agent as true to 
 the best of his knowledge and information and belief, and 
 shall be in such form as the secretary of state shall pre- 
 scribe, and on such blanks as the secretaiy of state shall 
 prescribe and on such blanks as the secretaiy of state may 
 furnish. No fee shall be charged for filing such report. 
 
 § 16. For failure to file said statement, the registered 
 agent shall be liable for a penalty in the sum of one lumdrcd 
 dollars, to be sued for and recovered by the Attorney-Clen- 
 eral or other officer designated by him, or by the district 
 
408 BUSINESS ORGANIZATION DOCUMENTS 
 
 attorney of the county in which the registered office is lo- 
 cated. 
 
 4. Certificate of Incorporation and By-Laws, 
 
 § 17. The certificate of incorporation shall be signed 
 in person by all the subscribers to the capital stock named 
 therein and by the registered agent. 
 
 § 18. The certificate of incorporation shall contain: 
 
 1. The name of the company, which shall not be the 
 same as that of any other company registered in this state 
 or likel}^ to be misunderstood therefor. 
 
 2. The location, to^^^l or city, street and number, if there 
 be number, of its registered office in this state. 
 
 3. The name of the agent therein and in charge thereof 
 and upon whom process against the corporation may be 
 served, in accordance with the provisions of this act. 
 
 4. The principal purj^ose or purposes for which the com- 
 pany may be formed, and such subsidiary purposes and 
 special powers in connection with the principal purpose or 
 purposes as the incorporators may see fit to insert therein, 
 in accordance with the provisions of this act. 
 
 5. The amount of the total authorized capital stock of 
 the corporation Avhich shall not be less than one thousand 
 dollars. 
 
 6. The number of shares into which the same is divided, 
 and the par value of each share, to be not less than ten dol- 
 lars nor more than one thousand dollars. 
 
 7. The amount of capital stock which is subscribed by 
 the incorporators, which shall not be less than one thousand 
 dollars in all, nor less than one share for any one. 
 
 8. If there be more than one class of stock, a descrip- 
 tion of the respective classes with the terms upon which 
 the respective classes are created. 
 
 9. The names and post-office addresses of the incorpo- 
 rators, not the registered office, and the number of shares 
 
CORPORATION ACTS 409 
 
 siil)scril)od l)y each, tojj^othcr w itli llic (l('si|rnaiion oi' tlic 
 kind of shares sul)S('ril)('d. 
 
 10. The period of (Inraticui of tlie company, limited or 
 
 imliniited. 
 
 § 19. Tlie eertificate of incorporation may contain any 
 provision not inconsistent with this act, ^vllich the incor- 
 poratcM's may clioosc to insert for the regnlation of the 
 bnsincss and for the conduct of the affairs of the corpora- 
 tion, and must contain all the provisions creatines defin- 
 uvj:, liniitiiii? and ree^nhitin^ the powers of the company, 
 the directors and stockholders, and of any class or classes 
 of stockliolders, or any right or rights of specific stock- 
 holders. No provision creating, defining, differentiating, 
 limiting and regulating the powers of the corporation, the 
 directors, the stockholders, or any class or classes of stock- 
 holders, shall be valid unless inserted in the certificate of 
 incorporation or in an amendment thereof. 
 
 § 20. The certificate of incorporation must be execut- 
 ed by natural male persons who must be of full age, but 
 without restriction as to nationality, citizenship, or resi- 
 dence. 
 
 § 21. Tlic certificate of incorporation shall be proved 
 or acknowledged as required for deeds of real estate, and 
 filed in the office of the secretary of state. Said certificate 
 or a copy thereof duly certified by the secretary of state 
 shall be evidence in all courts and places. A copy of the 
 certificate must also be kept in the registered office of the 
 company, and a copy must be furnished by the registered 
 agent to any person demanding the same on payment of 
 a charge of not more than one dollar. 
 
 § 22. On filing the certificate of incor])oration the in- 
 corporators shall pay the secretary of state the following 
 fees for the use of the state: 
 
 1. Twenty cents on each one thousand doHars of capi- 
 tal stock autiiorized; but in no case less than twenty-five 
 dollars. 
 
410 BUSINESS ORGANIZATION DOCUMENTS 
 
 2. For increase of capital stock, twenty cents per one 
 thousand dollars of increase; but in no case less than twen- 
 ty dollars. 
 
 3. For merger or consolidation of corporations, twenty 
 cents for each thousand dollars authorized, beyond the 
 total authorized capital of the corporations merged or con- 
 solidated, but in no case less than twenty dollars. 
 
 4. For extension or renewal of corporate existence, 
 twenty-five dollars. 
 
 5. For other certificates or notices required to be filed 
 under this act, five dollars each. 
 
 § 23. Upon making and filing the certificate of incor- 
 poration, and causing the same to be recorded as afore- 
 said, the persons so associating, their successors or assigns, 
 from the date of such filing shall be and constitute a body 
 corporate by the name set forth in said certificate. But 
 all corporations organized under this act shall be subject 
 to dissolution by the legislature at pleasure, to the repeal 
 or qualification of their charter by amendment of this act, 
 or otherwise, by act of the legislature of the State of New 
 York. 
 
 § 24. It shall be lawful for the incorporators of any 
 company, before the subscription of any part of its capital 
 in addition to that subscribed by the incorporators in the 
 charter, to amend its certificate of incorporation in any re- 
 spect whatsoever, changing or altering the same in accord- 
 ance with the provisions of this act by making and filing 
 a new certificate to be signed by all of the original incor- 
 porators, provided, that for the filing of the amended cer- 
 tificate an additional fee of five dollars is to be paid to the 
 secretary of state. 
 
 § 25. Every corporation organized under this act may 
 change the nature of its business, change its name, in- 
 crease its capital stock, decrease its capital stock, change 
 the par value of the shares of its capital stock, change the 
 location of its registered office in this state, extend its cor- 
 
CORPORATION ACTS 411 
 
 porate existence, create one or more classes of preferred 
 stock, and make such other amendment, change or altera- 
 tion as may be desired, in the manner following; The 
 board of directors shall pass a resolution declaring that 
 such change or alteration is advisa])le and shall call a meet- 
 ing of the stockholders to take action thereon. The meet- 
 ing shall be held upon such notice as the certificate of in- 
 corporation or by-laws provide, and in the absence of such 
 provision, upon three weeks' notice, given personally or 
 by mail. If two-thirds in interest of each class of the 
 stockholders having voting powers shall vote in favor of 
 such amendment, change or alteration, a certificate thereof 
 shall be signed by the president and secretary under the 
 corporate seal, acknowledged or proved as in the case of 
 deeds of real estate, and such certificate, together with the 
 written assent, in person or by proxy, of two-thirds in in- 
 terest of each class of such stockholders, shall be filed in 
 the office of the secretary of state, and upon the filling of 
 the same and the payment of the fee required, the certifi- 
 cate of incorporation shall be deemed to be amended ac- 
 cordingly; provided, that such certificate of amendment, 
 change or alteration shall contain only such provision as it 
 would be lawful and proper to insert in an original certifi- 
 cate of incorporation made at the time of making such 
 amendment; and provided further that in case the corpora- 
 tion by such amendment proposes to undertake business 
 which is not of the same general character as that provid- 
 ed in the original certificate, or creates one or more new 
 classes of stock, or gives to certain classes of stock or bonds 
 new privileges, or increases the amount of the capital stock, 
 a vote of four-fifths of each class shall be required and any 
 dissenting stockholder may declare his dissent in writing 
 at the meeting called for the purpose of amendment, and 
 may sell to the company and the company shall buy his 
 holdings of stock at a valuation appraised in the manner 
 provided in section one hundred eighteen for dissent- 
 
412 BUSINESS ORGANIZATION DOCUMENT^ 
 
 ing stockholders in case of merger or consolidation of com- 
 panies. If such dissent is declared in writing at the meet- 
 ing the subsequent proceedings for appraisement and pur- 
 chase may be enforced at the instance of either party. The 
 certificate of the secretary of state that such amended cer- 
 tificate and assent have been filed in his office shall be tak- 
 en and accepted as evidence of such change or alteration 
 in all courts and places. 
 
 § 26. Any company in this state or any foreign cor- 
 poration, whether organized under special charter or under 
 a general law, which would be qualified to organize under 
 this act, may, by complying with the procedure in the fore- 
 going section, and stating also the facts, and giving the 
 information necessary to be contained in an original certifi- 
 cate of incorporation under this act, be registered and 
 incorporated under this act, and from the date of filing said 
 certificate, this act shall apply. A domestic corporation 
 reorganizing under this act will be exempt from payment 
 of incorporation fees. 
 
 § 27. All companies existing at the coming into force 
 of this act, and all companies hereafter organized under 
 the present business corporation laws, unless they elect to 
 put themselves under its provisions in the manner pre- 
 scribed in the preceding sections, shall remain subject to 
 the laws r^ating to them, as if this act had not been passed. 
 
 § 28. The power to make and alter by-laws shall be 
 in the stockholders; but the corporation may in its certifi- 
 cate of incorporation confer that power upon the directors. 
 By-laws made by the directors under powers so conferred 
 may be altered or repealed by the stockholders at any spe- 
 cial meeting called for that purpose, upon due notice, or at 
 the annual meeting, without notice. 
 
 § 29. No by-laws adopted by the board of directors 
 regulating the election of directors or officers shall be valid, 
 unless a copy thereof shall be delivered or mailed to each 
 
CORPORATION ACTS 413 
 
 stockholder of record at least thirty days before such elec- 
 tion. 
 
 § 30. Every stockholder shall be entitled to receive, 
 and every corporation ])y its officers and board of directors 
 shall be bound to furnish any stockholder Hi)()n I'cquest, at 
 the expense of the eorporation, a copy of the certificate of 
 incorporation and of tlie by-laws. 
 
 5. Directors. 
 
 § 31. The business of every coi-poration organized 
 vmder this act shall be managed by its directors who shall 
 respectively be bona fide shareholders therein. At least 
 one of the directors must be an actual resident of this state. 
 
 § 32. The directoi-s shall not be less than three in num- 
 ber, but shall consist of three or as many more as the incor- 
 porators shall see fit. They shall l)e chosen annually by 
 the stockholders at the time provided in the by-laws, shall 
 hold office for one year, and until othei-s are chosen and 
 qualified in their places, unless other provision be made in 
 the certificate of incorporation. 
 
 § 33. Any corporation organized under this act may 
 classify its directors in respect to the time for which they 
 may hold office, the several classes, however, to be as nearly 
 as is numerically possible, equal in number and elected for 
 different terais. Provided, 
 
 1. That no class shall be elected for a period shorter 
 than one year except at the first election, for the first year, 
 or for more than five years, and 
 
 2. That the teim of office of at least one class shall ex- 
 pire each 3'ear. 
 
 § 34. Any cori">oration which shall have more than one 
 kind of stock, by making suitable provision in its certificate 
 of incorporation, may confer the right to choose the di- 
 rectoi-s upon the stockholders of any class or classes, or 
 upon the bondholders, to the exclusion of others, subject, 
 in case this power is granted b)^ amendment, to the right 
 
414 BUSINESS ORGANIZATION DOCUMENTS 
 
 of minority stockholders provided in section twenty-five 
 regarding amendments to the certificate of incorporation. 
 
 § 35. Every director shall have the power at any time 
 to resign from the corporation, the acceptance of his resig- 
 nation not being necessary to complete the resignation, pro- 
 viding and if, within thirty days after his resignation, the 
 corporation shall file in the office of the secretary of state 
 and the registered office the designation of a ncAV director 
 in his place, or if the director so resigning shall file a notice 
 in the same places of the fact of his resignation. Until 
 notice of the resignation is so filed, and the special obliga- 
 tions incurred as director before his resignation are ful- 
 filled, the director shall in no wise be relieved of his respon- 
 sibility as director. 
 
 6. Elections. 
 
 § 36. All elections of directors shall be by ballot. The 
 poll at every such election shall be open between the hours 
 of nine o'clock in the morning and five o'clock in the after- 
 noon, and shall remain open for at least one hour unless all 
 the stockholders are present in person or by proxy, and 
 have sooner voted, or unless all the stockholders waive this 
 provision in writing. 
 
 § 37. Any corporation may, by making suitable pro- 
 vision in its certificate of incorporation, determine what 
 number of shares shall entitle the stockholders to one or 
 more votes, what number of stockholders shall attend 
 either in person or by proxy, or what number of shares shall 
 of necessity be required in any meeting in order to consti- 
 tute a quorum. If suitable provision be made in the certif- 
 icate of incorporation, any plan of cumulative or propor- 
 tional voting may be established; but unless some such plan 
 has been adopted, the persons receiving the greatest num- 
 ber of votes at an election shall be directors. 
 
 § 38. Every election shall be in charge of two inspect- 
 ors to be appointed in the manner provided by resolution 
 
CORPORATION ACTS 415 
 
 of the board of (liiTt-tors or l)v tlie stocklioldors. Such in- 
 spectors shall make their return in writing and shall verify 
 the same under oath. 
 
 § 39. Unless otherwise provided in the certificate of 
 incorporation, at every election each stockholder, whether 
 resident or non-resident, shall be entitled to one vote in per- 
 son or by proxy given in writing for each share of the cap- 
 ital stock held by him; but no proxy shall be voted on after 
 one year from its date or by any candidate for election as 
 a director. No stock shall be voted on at any election 
 which has been transferred on the books of the coi*poratiun 
 within twenty days preceding such election; nor shall any 
 stock which has been issued, whether original or other- 
 wise, within twenty days of the said election, be voted upon. 
 
 § 40. Every person holding stock as executor, admin- 
 istrator, guardian or trustee, or in any other representative 
 or fiduciary capacity, may represent the same at all meet- 
 ings of the corporation, and may vote thereon as a stock- 
 holder, and every person who shall pledge his stock as col- 
 lateral security may, nevertheless, represent the same at 
 all such meetings, and may vote thereon as a stockholder, 
 unless in the transfer to the pledgee on the books of the cor- 
 poration he shall have expressly empowered the pledgee to 
 vote thereon, in which case only the pledgee or his proxy 
 may represent said stock and vote thereon. 
 
 § 41. Shares of its own stock belonging to the said 
 corporation shall not be voted upon directly or indirectly, 
 and this shall apply to all shares of stock held by a trustee 
 for the benefit of those owned or controlled by the corpora- 
 tion. 
 
 § 42. In case the right to vote upon any share of stock 
 shall be questioned, the inspectors of election shall refer 
 to the stock or transfer books of the corporation to ascer- 
 tain who are the stockholders, and in case of a discrepancy 
 between the books, the transfer books shall control and de- 
 termine who are entitled to vote. 
 
416 BUSINESS ORGANIZATION DOCUMENTS 
 
 § 43. The directors of every company organized under 
 this act shall cause the registered agent, or other transfer 
 agent designated by them as having charge of the said 
 books, to make, at least ten days before every election after 
 the first election, a full, true and complete list, arranged in 
 alphabetical order, of all the stockholders entitled to vote 
 at the ensuing election, with the post-office addresses, not 
 the registered office of the corporation, of each, and the 
 number of shares of each kind of stock held by each, which 
 list shall, at all times during the usual business hours, be 
 kept at such registered office open to examination by any 
 stockholder. 
 
 § 44. The board of directors shall produce at the time 
 and place of every election of directors, such books and 
 such list, there to remain during the election. A copy of 
 such list shall be mailed to any stockholder within five da}' s 
 after his request is received, upon pajanent in advance of 
 cost of copying at not over ten cents per folio of one hun- 
 dred words. 
 
 § 45. The neglect or failure of the said directors of a 
 corporation with a capital stock of five hundred thousand 
 dollars or upwards to cause the said books so to be kept, or 
 to cause the said list to be so made and filed, or to produce 
 the said books or the said list at the time of any election, 
 shall render them ineligible to hold office as director, or 
 any other office in the company for the period of one year 
 thereafter. In addition to the penalty above named for 
 failure the sum of one hundred dollars each may be col- 
 lected from any or all of the directors at the suit of any 
 stockholder, for his o^^ti use. Delinquent directors of cor- 
 porations with a capital stock of less than five hundred 
 thousand dollars shall be subject to the last-named penalty 
 only. 
 
 7. Officers. 
 § 46. Every corporation organized under this act shall 
 
CORPORATION ACTS 417 
 
 have a president, vice-president, one or more aiiditoi*s, src- 
 retaiy and treasurer, who, witli the exception (►£ the aiidit- 
 01*8, shall he chosen hy the stockholders, or directors, as the 
 certihcate of incorporation shall })rovide. They shall hold 
 their offices annually, or in accordance with the provisions 
 of this act, and until others are chosen and qualified in 
 their stead. 
 
 § 47. The president and vice-president shall he chosen 
 from among the directors. 
 
 § 48. The secretary shall be sworn to the faithful dis- 
 charge of his duty and mav, if the certificate of incorpora- 
 tion so provides, be appointed by the board of directoi^ to 
 hold office during the pleasure of the board. 
 
 § 49. The treasurer shall give a bond in such sum and 
 with such surety or sureties as shall be required by the by- 
 laws for the faithful discharge of his duty, which sum shall 
 not be less than one thousand dollars. 
 
 § 50. The auditor or auditoi-s shall be chosen by the 
 stockholders at their annual meeting and no person or firm 
 or corporation, a member, director or officer of which may 
 be a dii-ector of the company to be audited shall be eligible. 
 Corporations organized under this act with a capital stock 
 of one hundred thousand dollars or upwards, must select 
 as auditor or auditors a person, fiiTu or corporation duly 
 qualified and engaged in the practice of public accounting 
 and auditing in this state. And the auditor or auditors se- 
 lected by a corporation whose capital stock amounts in all 
 to one million dollars must have his or their financial re- 
 sponsibility secured by a bond of fifty thousand dollars of 
 some surety company authorized to do business under the 
 insurance laws of this state; and for a corporation whose 
 capital stock is less than one million dollars, by a bond 
 amounting to at least five per centum of the capital stock 
 and approved by the shareholders. The above ])rovisions 
 regarding bonds may be waived by the written consent of 
 every shareholder. 
 
 B— 11— J7 
 
418 BUSINESS ORGANIZATION DOCUMENTS 
 
 § 51. The corporation may also have such other of- 
 ficers, agents, or factors, to be chosen in the manner and to 
 hold their offices, for such times as may be prescribed in the 
 by-laws. Corporations with five hundred thousand dollars 
 capital stock or upwards must appoint a general counsel- 
 who shall be counted in the list of officers. 
 
 § 52. Any stockholder shall be entitled upon payment 
 of cost of copying at not over ten cents a folio of one hun- 
 dred words to a statement at any time of all salaries paid 
 to any officer or officers of the corporation, together with a 
 statement of all contracts or agreements in w^hich any of- 
 ficer of the corporation may be interested either as a con- 
 tracting party with the corporation or as an officer or stock- 
 holder in any other corporation contracting with the com- 
 pany. 
 
 § 53. The salaries of the officers shall be fixed at the 
 annual meeting unless the articles of incorporation provide 
 otherwise. In case, however, salaries shall be increased at 
 any time by the board of directors under provision of the 
 articles of incorporation, report thereof must be made at 
 the next annual meeting to the stockholders and laid be- 
 fore them for ratification. Their action shall be conclusive 
 in all particulars. 
 
 § 54. Any vacancies occurring in the board of di- 
 rectors or in the office of president, vice-president, secre- 
 tary or treasurer by death, resignation, removal or other- 
 wise, shall be filled in the manner provided for in the by- 
 laws. In the absence of such provision such vacancies shall 
 be filled by the board, but if the number of directors is in- 
 creased between the annual meetings, or by the directors 
 themselves, the directorships thus created are not vacancies 
 within the meaning of this section but must be filled by the 
 vote of the stockholders. 
 
 § 55. If any certificate made, or any public notice given 
 by the officers or directors of any corporation in pursuance 
 of the provisions of this act, shall be false in any material 
 
CORPORATION ACTS 419 
 
 representation, all the ollicers or directors who shall have 
 signed the same, knowinc^ it to be false^ shall he Jointly and 
 severally liable for all the debts of the corporation con- 
 tracted while they were directors or officers thereof, as a 
 penalty enforceable in the courts of this state only. 
 
 8. Meetings. 
 
 § 56. The first meeting of every corporation shall be 
 called by a notice signed by a majority of the incorpora- 
 tors, designating the time, the place, which must be the 
 registered office of the corporation designated in the certifi- 
 cate of incorporation, and the purpose of such meeting; 
 which notice shall be published at least two weeks before 
 the meeting, in some newspaper of the tovm. where the cor- 
 poration is established, or, if there be no newspaper in the 
 town or city, in the county; or, such meeting may be called 
 without publication, if such notice be mailed to each of the 
 incorporators at least five days, exclusive of the day of 
 mailing, before the date of meeting, or if two days* notice 
 be personally served upon all the incorporatoi-s, or if all of 
 the incorporators shall in writing waive notice of the mat- 
 ters required by this statute and fix a time and place of such 
 meeting. In such case no notice shall be required. 
 
 § 57. All meetings of stockholders of every coi^oora- 
 tion organized under this act shall be held at its registered 
 office in this state. But the directors may hold their meet- 
 ings, and may have one or more offices, and one or more 
 transfer offices of stock, and may keep the books of the 
 corporation elsewhere within or without the state with the 
 exception of the stock and transfer books, as provided in 
 section eight, if the certificate of incorporation so provides. 
 
 § 58. At the regular annual meeting, for which pro- 
 vision must be made in the certificate of incoq^oration or 
 in the by-laws, the shareholders' balance sheet pre})ared 
 and certified by the auditors as provided in title twelv(; 
 must be presented to the shareholdei's. If the directors 
 
420 BUSINESS ORGANIZATION DOCUMENTS 
 
 or other officers of any corporation organized under this 
 act shall fail or neglect to call in the manner provided by 
 law the annual stockholders ' meeting at the time appointed 
 in the certificate of incorporation or in the by-laws and shall 
 not hold the same accordingly thereupon, from the time 
 when said meeting was appointed to be held until the meet- 
 ing shall actually be held thereafter, all salaries of all of- 
 ficers and directors shall cease and determine, and it shall 
 be unlawful for any corporation or its officers or directors to 
 pay directly or indirectl}^ any salary or compensation to 
 any officer or director for services rendered in the interim. 
 § 59. At the annual meeting any shareholder shall be 
 entitled to require from the company, and the directors 
 shall be bound to furnish him \\dth a copy of all or any 
 parts of the directors' records of meetings. Said share- 
 holder may be required to pay the cost of making a copy 
 of said records at a rate not to exceed ten cents for every 
 folio of one hundred words. 
 
 9. Stocks and Bonds. 
 
 § 60. Every corporation shall have power to create two 
 or more kinds of stock of such classes, with such designa- 
 tions, preferences and voting powers, or restrictions or 
 qualifications thereof, as shall be stated in the certificate 
 of incorporation. The power to increase or to decrease the 
 stock, as in this act elsewhere provided, shall apply to all 
 classes of stock. Such preferred or classified shares may, 
 if desired, be made subject to redemption, at not less than 
 par, at a time and place to be fixed in the certificate of in- 
 corporation. No corporation shall create preferred or dif- 
 ferentiating shares of stock, except the same be provided 
 for in the said certificate of incorporation. The liability of 
 holdere of all classes of stock is limited to the payment of 
 the subscription for the stock itself at par value as pro- 
 vided in the act. 
 
 § 61. By making suitable provision in its certificate 
 
CORPORATION ACTS 421 
 
 of incorporation, tlio corporation may issue bonds and 
 dobonturos, wliethor socnrod ])y mortG^n^i^o or otbonviso, and 
 may ^ixe to the holdei-s of such bonds or de])onturcs votin,i^ 
 powers, under such circumstances and in such manner as 
 the certificate of incorporation shall provide, and such vot- 
 ing power may be equal and equivalent to those of the 
 stockholders. 
 
 § 62. The word ''stockholder" wherever used in lliis 
 act shall be construed to include all bondholders who pur- 
 suant to the terms of this act are entitled to vote. 
 
 § 63. Every stockholder shall be entitled to receive a 
 certificate of stock signed by two officers of the cori)oration. 
 Ever}^ certificate of stock and every bond shall specify the 
 amount of capital stock authorized to be issued by said 
 corporation, the amount of each class, if there is more than 
 one class, also the amount of each class issued for casli 
 and for other consideration, the par value of each share, 
 and the location of the registered office of the company, and 
 shall disclose fully and fairly any qualification or restric- 
 tion contained in the certificate of incorporation affecting 
 the right of the stockholder, or, in case of l)onds, of the 
 bondholder, by way of voting power or otherwise. 
 
 § 64. Any corporation or individual countersigning 
 the said stock or bonds, either as transfer agent or as regis- 
 trar of the stock, shall be deemed to guarantee the legality 
 and regularity in all particulars of the transfer, unless tiu^ 
 countersign itself shall give notice in clearly legible char- 
 acters that said countersigning agent limits or refuses re- 
 sponsibility. 
 
 § 65. The shares of stock in every corporation shall 
 be personal property, shall be transferable on the l)ooks of 
 the company in such manner and under such regulations as 
 the l)y-laws provide, and whenever any transfer of shares 
 shall be made for collateral security and not absolutely, it 
 shall be so expressed in the entry of transfer; but the power 
 
422 BUSINESS ORGANIZATION DOCUMENTS 
 
 to vote upon sucli stock shall remain in the owner thereof 
 and not in the pledgee, unless expressly so stated. 
 
 § 66. Every share of stock shall be deemed to be issued 
 and shall be held subject to the payment of its par value in 
 cash, unless before the issuance of said stock a contract 
 shall be filed in the registered office of the company which 
 shall truly and fully disclose in detail the consideration 
 for which the said stock is issued, whether the same be for 
 property, services or otherwise. 
 
 § 67. In case any stock is issued for consideration 
 other than cash, every share of stock shall have stamped 
 across its face a statement that stock has been issued in 
 accordance with a contract filed in the registered office and 
 the proportion of shares of each class so issued. 
 
 § 68. Every such contract so filed in the registered 
 office shall truly and fully disclose the consideration for 
 which said stock is issued, the parties to whom such stock 
 is issued and the real parties in interest. Such contract 
 shall be open during regular office hours to the inspection 
 of any one and a copy thereof shall be furnished by the 
 registered agent of the corporation to any one requesting 
 it and advancing the cost of making a copy thereof, which 
 cost shall not exceed the sum of ten cents per folio of one 
 hundred words. In every annual report made by the com- 
 pany, the amount of capital paid in cash and the amount 
 otherwise issued in pursuance of the provisions of the fore- 
 going sections shall be stated together with the specific 
 amounts issued during the two years next preceding. 
 
 § 69. The judgment of the board of directors as to the 
 value of the consideration other than cash thus received by 
 the company shall be final and conclusive upon all parties, 
 provided, that all the provisions of this act relating thereto 
 be fully carried out, and that the contracts fairly and fully 
 disclose the real nature of the bargain thus recorded. 
 
 § 70. Where the whole capital of the corporation shall 
 not have been paid in, and the capital paid shall be insuffi- 
 
CORPORATION ACTS 423 
 
 cient to satisfy its debts and o])lii^^atioiis, each stofklioldcr 
 shall be bound to pay on each share held by him the sum 
 necessary to complete the amount of such share, as fixed 
 by the charter of the corporation, or sucli ])ioi tort ion of 
 that sum as shall be required to satisfy such deljts and 
 obli2:ations. 
 
 § 71. No loan of money shall be made to any stock- 
 holder to enable such stockholder to withdraw in effect any 
 part of the money paid in by him on his stock; and if any 
 such loan be made, the officers who make it or assent to it 
 shall be jointly and severally liable to the extent of such 
 loan and interest for all the debts of the corporation until 
 the repayment with interest of the sum so loaned. 
 
 § 72. The directors of every corporation may, from 
 time to time, make assessments upon the shares of stock 
 subscribed for, not exceeding, on the whole, the par value 
 thereof; and the sums so assessed shall be paid to the treas- 
 urer at such times and by such installments as the directors 
 shall direct, said directors having given thirty days' notice 
 of the assessment and of the time and place of payment 
 either personally or by mail or by pu])lication in a news- 
 paper published in the county where the corporation is 
 established. 
 
 § 73. If the o^^T^er of any shares shall neglect to pay 
 any sum assessed thereon for thirty days after the time 
 appointed for payment, the treasurer, when ordered by the 
 board of directors, shall soil, at public auction, such num- 
 bers of the shares of the delinquent owner as will pay all 
 assessments then due from him, with interest and all nec- 
 essary incidental charges, and shall transfer the shares sold 
 to the purchaser, who shall be entitled to a certificate there- 
 for. 
 
 § 74. The treasurer shall give notice of the time and 
 place appointed for the sale and of the sum due on each 
 share by advertising the same three weeks successively, 
 once in each week, before the sale, in some newspaper i^ub- 
 
424 BUSINESS ORaANIZATION DOCUMENTS 
 
 lished in the county where the corporation is established, 
 and by mailing a notice thereof to the delinquent stock- 
 holder at his post-office address, not the registered office 
 of the company. 
 
 § 75. The president and secretary, or treasurer, upon 
 the payment of the amount of capital subscribed in the cer- 
 tificate of incorporation, whether up to the amount author- 
 ized by its certificate or in addition thereto, if increased in 
 the manner provided by this act, shall make a certificate 
 stating, in addition to the requirements of section eighteen 
 of this act, the amount of capital so paid, whether paid in 
 cash or otherwise; the total amount of capital, if any, pre- 
 viously paid in and reported, with the date of such report, 
 and also stating with regard to any such additional stock 
 thus issued for consideration otherwise than cash, the date 
 of filing the contract determining such issue. This certifi- 
 cate shall be signed and sworn to by the president and sec- 
 retary or treasurer, and the directors shall, within ten 
 days, cause the certificate to be filed in the office of the sec- 
 retary of state and a copy thereof in the registered office of 
 the company. In case of their failure so to do, the direct- 
 ors of the company whose terms shall expire at the next 
 annual election shall each and all be disqualified for a period 
 of one year from being elected or serving as directors or 
 officers of the corporation. 
 
 § 76. But no director shall be thus disqualified if be- 
 fore the time of the annual meeting he shall file a state- 
 ment in the office of the secretary of state and a copy thereof 
 in the registered office of the company, stating that he has 
 endeavored to have such certificate properly made and 
 filed, but that the officers have neglected to make and file 
 the same, and shall make such certificate giving the facts 
 so far as they are within his knowledge or are obtainable 
 from sources of infoiTnation open to him, and shall verify 
 the certificate to be true to the best of his knowledge, infor- 
 mation and belief. 
 
CORPORATION ACTS 425 
 
 § 77. If any of tlio said officers or dirortors shall nog- 
 loct or refuse to perfonn the duties required of them in 
 section seventy-five for ten days after being requested in 
 writing so to do by any creditor or stockholder of the cor- 
 poration, the directors so neglecting or refusing shall be 
 jointlv or severally liable for all the debts of the com])any 
 contracted before the filing of such certificate and until the 
 same shall be filed. 
 
 § 78. Any corporation, if proper provision is made in 
 the certificate of corporation, shall have the power to pur- 
 chase, hold, sell, assign, transfer, mortgage, pledge or other- 
 wise dispose of the stock of securities of other corporations, 
 and, while the owner thereof, to vote upon them to the same 
 extent as natural persons might or could do. 
 
 § 79. Every corporation shall have the power to pur- 
 chase or otherwise acquire its own capital stock, but only 
 out of its sur2:)lus earnings or in payment or satisfaction of 
 any debt due the company to such extent and manner and 
 upon such terms as the board of directors by two-thirds 
 vote shall detennine, and to re-issue the said stock so ac- 
 quired. Any such purchase or re-issue of stock shall be 
 noted in the annual report. 
 
 § 80. Any domestic corporation organized under this 
 act may increase or reduce its capital stock in the manner 
 herein provided. If increased, the holders of the additional 
 stock issued shall be subject to the same liabilities with 
 respect thereto as are provided herein in relation to the 
 original capital; if reduced, the amount of its debts and 
 liabilities shall not exceed the amount of its reduced capital. 
 The owner of any stock shall not be relieved fn^m any 
 liability existing prior to the reduction of the capital stock 
 of any stock corporation. 
 
 § 81. Every such increase or reduction must be au- 
 thorized by a vote of the stockholders in accordance with 
 the provisions of section twenty-five of this act. 
 
 § 82. Such increase or reduction shall not become 
 
426 BUSINESS ORGANIZATION DOCUMENTS 
 
 valid until entered in the amended certificate of incorpora- 
 tion, and filed in the office of the secretary of state and the 
 registered office of the company. 
 
 10. Dividends. 
 
 § 83. No corporation shall make dividends, except 
 from the surplus or net profits arising from its business, 
 nor divide, withdraw, or in any way pay to the stockhold- 
 ers, or any of them, any part of its capital stock, or reduce 
 its capital stock, except according to this act; and in case 
 of any violation of the provisions of this section, the direct- 
 ors under whose administration the same may happen shall 
 be jointly and severally liable, at any time mthin six years 
 after paying such dividend, to the corporation and to its 
 creditors, in the event of its dissolution or insolvency, to 
 the full amount of the dividend made or capital stock so 
 divided, withdrawn, paid out or reduced, with interest on 
 the same from the time such liability accrued; provided, 
 that any director, who may have been absent when the 
 same was done, or who may have dissented from the act or 
 resolution by which the same was done, ma}^ exonerate him- 
 self from such liability by causing his dissent to be entered 
 at large on the minutes of the directors, at the time the 
 same was done, or forthvdth after he shall have notice of 
 the same, and by causing a true copy of said dissent to be 
 filed in the registered office of the corporation and to be 
 published, within two weeks after the same shall have been 
 so entered, in a newspaper published in the county where 
 the corporation has its main place of business. 
 
 § 84. Dividends may be paid semi-annually or quarter- 
 ly on preferred stock, and, thereafter, a like amount on the 
 common stock, if the directors so decide and the certificate 
 of incorporation permits, Avithout waiting for the end of 
 the fiscal year. Such semi-annual or quarterly dividend 
 on common stock shall not exceed that paid on preferred 
 stock; but at the end of the fiscal year the full amount of 
 
CORPORATION ACTS 427 
 
 the surplus caruini^s, after payment of dividends on pre- 
 ferred stock, and of otlior ])i-ior obliterations, may be dis- 
 tributed among the holders of the comnion stock. 
 
 11. Promotion. 
 
 § 85. Every prospectus, announcement or advertise- 
 ment of whatever kind, howsoever publislied, printed, cir- 
 culated or issued after the conunencement of this act, pro- 
 vided the same is published or issued with a view of ob- 
 taining subscriptions for shares or bonds in a company or- 
 ganized under this act, or directly or indirectly inviting per- 
 sons to subscribe for shares or bonds in a company so or- 
 ganized shall specify: 
 
 1. The names and addresses of the promoters and di- 
 rectors and the number of shares held or agreed to be taken 
 up by them respectively and whether wholly paid up or 
 partly paid up and the consideration, remuneration or re- 
 ward, if any, to the incoi-porators, directors, promoters, 
 underwriters or others respectively for becoming incor- 
 porators, directors, promoters, underwriters or members 
 of the company; 
 
 2. The date and the names of the parties to any con- 
 tract directly or indirectly relating to the company or to 
 the promotion thereof entered into by the company or the 
 promoters, directors, or trustees thereof or any person act- 
 ing as a trustee or agent for or on behalf of them or any of 
 them and whether such contract be entered into with the 
 promoters or directors or any of them or any other per- 
 son whomsoever within two years before the issue of such 
 prospectus whether subject to adoption by the directors of 
 the company or otherwise, and shall also state a place where 
 such contract if in writing may be inspected, which place 
 must be the registered office of the company, if that is yet 
 organized, provided that this subdivision of this section 
 shall not apply to a contract entered into by the company 
 after its incorporation in the ordinary course of the business 
 
428 BUSINESS ORGANIZATION DOCUMENTS 
 
 carried on by the company, unless stock or bonds are issued 
 or to be issued as a consideration; 
 
 3. The contents of the articles of incorporation, if any, 
 with the names and addresses of the subscribers thereto 
 and the number of shares subscribed for by them respec- 
 tively, together with the number of shares fixed as the qual- 
 ification of a director; 
 
 4. The consideration paid or to be paid, and if so, how 
 and when, for any property purchased or acquired or to be 
 purchased or acquired by the company and from whom and 
 when purchased or acquired, with a brief description of the 
 nature of the property and its location if physical property, 
 and whether any part and if so, how much of such consider- 
 ation money is for good- will; 
 
 5. Tlie amount, if any, payable as commission, bonus 
 or reward for subscribing or agreeing to subscribe or pro- 
 curing or agreeing to procure subscriptions for or for under- 
 writing or guaranteeing the sale of any shares in the com- 
 pany or the rate of any such commission; 
 
 6. The minimum subscription upon which the directors 
 will allot the shares subscribed, and begin business; 
 
 7. The minimum amount payable on application and 
 allotment on each share; 
 
 8. The number and amount of shares issued or agreed 
 to be issued as fully or partly paid up otherwise than in 
 money, and in the latter case the extent to which they are 
 so paid up, and in either case the consideration for which 
 and the person or persons to whom such shares have been 
 issued or are proposed or intended to be issued; 
 
 9. The names and addresses of the vendors of any 
 property purchased or acquired by the company or to be so 
 purchased or acquired, which is to be paid for wholly or 
 partly out of the proceeds of the issue offered for subscrip- 
 tion by the prospectus or the purchase or acquisition of 
 which has not been completed at the date of publication of 
 the prospectus and where there is more than one vendor 
 
CORPORATION ACTS 429 
 
 or the company is a subpurchaser, i\\v amount payable in 
 money or shares to each vendor; 
 
 10. The amount or estimated amount of preliminary 
 expenses; 
 
 11. The amount paid or intended to be paid in cash or 
 shares or otherwise, to or for any promoter and the consid- 
 eration therefor; 
 
 12. The amount intended to be reserved for working 
 capital; 
 
 13. The proposed application of the proceeds of the 
 issue of the shares; and 
 
 14. The names and addresses of the auditors or in- 
 tended auditors, if any, of the company. 
 
 § 86. A prospectus which does not comply with the 
 preceding section shall be deemed to be fraudulent on the 
 part of the following persons knowingly issuing the same, 
 that is to say: 
 
 1. Every person who is a director or manager of the 
 company at the time of the issue of the prospectus; and 
 
 2. Every person who having authorized such naming of 
 him is named in the prospectus as a director of the company 
 or as having agreed to become a director of the company 
 either immediately or after an interval of time, and 
 
 3. Every promoter of the company. 
 
 § 87. Every person taking shares on the faith of such 
 prospectus unless he had actual notice of the particulars 
 omitted from the prospectus shall, in addition to any other 
 remedy he may have, be entitled to sue for rescission of his 
 contract to take shares. 
 
 § 88. In the event of non-compliance with any of the 
 requirements of this act with respect to a prosj^ectus, any 
 person aggrieved shall be entitled to compensation from 
 any person knowingly issuing the same, and on the part of 
 whom the prospectus is by vii*tue of the provisions of this 
 section deemed to be fraudulent unless such last-mentioned 
 person proves that — 
 
430 BUSINESS ORGANIZATION DOCUMENTS 
 
 1. As regards any matter not disclosed he was not cog- 
 nizant thereof, and could not with reasonable diligence 
 have discovered it; or 
 
 2. The non-compliance arose from an honest mistake 
 of fact on his part ; or 
 
 3. The person aggrieved had actual notice of the mat- 
 ter not disclosed. 
 
 § 89. For the purposes of this section every person 
 shall be deemed to be a vendor who has entered into any 
 contract absolute or conditional for the sale or purchase or 
 for any option of purchase of any property to be purchased 
 or acquired by the company in any case where 
 
 1. The purchase money is not fully paid at the date of 
 publication of the prospectus; or 
 
 2. The purchase money is to be paid or satisfied wholly 
 or in part out of the proceeds of the issue offered for sub- 
 scription by the prospectus ; or 
 
 3. The contract depends for its fulfillment on such 
 issue. 
 
 § 90. Where any of the property to be purchased or 
 acquired by the company is to be taken on lease, this sec- 
 tion shall apply as if the expression "vendor" included the 
 lessor, and the expression *' purchase money" included the 
 consideration for the lease, and the expression ''sub-pur- 
 chaser" included a sub-lessee. 
 
 § 91. This section shall not apply to a circular or notice 
 issued to and imdting only existing members of a company 
 to subscribe for further shares, but, subject as aforesaid, 
 this section shall apply to any prospectus whether issued on 
 or with reference to the formation of a company or sub- 
 sequently; provided that 
 
 1. The requirements as to the certificate of incorpora- 
 tion and the qualification of directors, the names and ad- 
 dresses of directors and the shares held or to be taken by 
 them, and the amount or estimated amount of preliminary 
 expenses shall not apply in the case of a prospectus pub- 
 
CORPORATION ACTS 431 
 
 lislicd more than one year after the formation of the com- 
 pany; and 
 
 2. In the case of a prospectus published more than one 
 year after the foiTnation of a company, the o])lijTation to 
 disclose all material contracts and facts shall be limited to 
 a period of one year immediately preceding the publica- 
 tion of the prospectus. 
 
 § 92. For the purpose of this act every contract and 
 fact is material which would influence the JTidgment of a 
 prudent iuA^estor in determining whether he would sub- 
 scribe for the shares offered by the prospectus. 
 
 § 93. Any condition requiring an applicant for shares 
 to waive, and any agreement to waive, due compliance with 
 this act or purporting to affect him with notice of any doc- 
 ument or matter not specifically referred to in the prospec- 
 tus shall be void. 
 
 § 94. Every promoter is in a fiduciary relation towards 
 a company which he is engaged in promoting, and conse- 
 quently 
 
 1. A promoter may not sell or let his own property, or 
 property in which he has an interest, to the company, and 
 may not be interested in any contract with the company, 
 unless at a general meeting of the shareholdei*s of the com- 
 pany before the completion of the purchase, lease or con- 
 tract a full and fair disclosure is made that he is the vendor 
 or lessor of or has an interest in the property or in the con- 
 tract, and of the nature and amount of that interest; 
 
 2. Any such contract as aforesaid with respect to 
 which such disclosure is not made shall be voidable at the 
 option of the company; 
 
 3. A promoter may not retain for his ovm use any prof- 
 it or remuneration, whether in money, shares, or otlierwise, 
 arising out of or received by liim in connection with tlie pro- 
 motion of the company or in consideration of services ren- 
 dered by him in the course of such promotion, unless at a 
 general meeting of the company full and fair disclosure has 
 
432 BUSINESS ORGANIZATION DOCUMENTS 
 
 been made of the nature and amount of that profit or re- 
 muneration, and the company has by formal resolution as- 
 sented thereto after such disclosure; and, 
 
 4. Every promoter shall be liable to account to the 
 company for the amount or value of any secret profit or re- 
 muneration and to repay the same to the company with 
 interest as the court may direct. 
 
 § 95. Where a person would, by his conduct or deal- 
 ings in the promotion of any company, or otherwise, have 
 incurred any liability, he shall not be discharged from such 
 liability by reason only of his having acted as agent or on 
 behalf of any person or company in respect of such promo- 
 tion. 
 
 12. Balance Sheet. 
 
 § 96. Every company and the directors and managers 
 thereof — 
 
 1. Shall cause to be kept proper books of account in 
 which shall be kept full, true and complete accounts of the 
 affairs and transactions of the company, and 
 
 2. Shall once at least in each year cause the accounts 
 of the company to be balanced and a balance sheet in this 
 act referred to as the shareholders' balance sheet to be pre- 
 pared, which balance sheet after being duly audited shall 
 be laid before the members of the company in general meet- 
 ing; and 
 
 3. Shall cause a copy of such shareholders' balance 
 sheet so audited to be sent to the registered address of 
 every member of the company at least seven days before 
 the meeting at which it is to be laid before the members of 
 the company and a copy to be deposited at the registered of- 
 fice of the company for the inspection of the members of the 
 company during a period of at least seven days before that 
 meeting, and every shareholder in the company or any per- 
 son acting in his behalf shall be entitled to other copies 
 thereof on payment of twenty-five cents each. 
 
CORPORATION ACTS 433 
 
 5 97. The shareholders' biUaucc sheet shall ])e in sucli 
 form as is directed by the certificate of incori)oration or 
 the by-laws or by a resolution of the company and shall 
 show in every case — 
 
 1. The amount of share capital authorized, the amount 
 issued, and the amount paid up thereon, distin^^iishin^' the 
 amount of share capital paid up in money and the amount 
 paid otherwise than in money, with statement of nature 
 of the consideration and the arrears of calls due, and the 
 specific amounts issued during the two years next pre- 
 ceding; 
 
 2. The amount of debts due by the company, specify- 
 ing the security if any, allocated for each debt and distin- 
 guishing the amount of mortgages, debentures and floating 
 charges against the general assets of the company, the 
 amount of the resen-e fund, if any, and the amount of any 
 contingent liabilities; 
 
 3. The amount of all current assets, after making a 
 proper deduction for de])ts considered to be ])ad or doubt- 
 ful; any debts due from directors or other officers to be 
 separately stated; 
 
 4. Whether the assets other than debts due to the com- 
 pany are taken at cost price or by valuation, or on what 
 other basis they are reckoned and whether any and if so 
 what amount of percentage has been written off and what 
 other provision, if any, has been made for depreciation; 
 
 5. The gross amount of the year's earnings, the deduc- 
 tions made from the same for fixed charges of interest and 
 taxes and the surplus, if any, available for dividends; 
 
 6. The amount by which the gross value of the assets 
 of the company has been increased since the last balance 
 sheet in consequence of any increase in the valuation of 
 real or personal property belonging to the company; 
 
 7. The amount of property, if any, for which shares 
 were issued, which has been sold since the last report with 
 a full disclosure of the consideration therefor in details, 
 
 B— II— J8 
 
434 BUSINESS ORaANIZATION DOCUMENTS 
 
 the parties to the contract and the real parties in interest; 
 
 § 98. The shareholders' balance sheet shall be accom- 
 panied by a certificate signed by two or more of the di- 
 rectors on behalf of the board stating that in their opinion 
 the balance sheet is drawn up so as to exhibit a correct 
 view of the state of the company's affairs and that in their 
 opinion the statement is correct; 
 
 § 99. A copy of the balance sheet shall be sent to each 
 director at least ten days before the annual meeting and 
 unless he formally at or before the meeting makes state- 
 ment to the contrary, he shall be held to have also signed 
 the report; 
 
 13. Auditors. 
 
 § 100. The auditors of every company: 
 
 1. Shall use reasonable diligence wdth the view of as- 
 certaining that the books of the company have been prop- 
 erly kept and record correctly the affairs and transac- 
 tions of the company; 
 
 2. Shall examine the shareholders' balance sheet and 
 any accounts presented to the members of the company, 
 and shall report in writing to the members of the company 
 that the balance sheet and accounts have been dvavm up in 
 accordance with the provisions of the New York Companies' 
 Act, and when taken together wdth any explanations at- 
 tached thereto, present a correct view of the state of the 
 company's affairs; or if the auditors are unable to make 
 such a report they shall report in writing in what respects 
 the balance sheet and accounts fail to comply with these 
 requirements, and shall sign a certificate at the foot of the 
 balance sheet stating whether or not all their requisitions 
 as auditors, including their requisitions vdth regard to the 
 private balance sheet hereinafter mentioned have been 
 complied with; and 
 
 3. Shall report in wanting to the members all material 
 information which thev have observed or have become ae- 
 
CORPORATION ACTS 435 
 
 quainted with with regard to the books, accounts, securities, 
 vouchers, papers, writings and documents examined by 
 them, and for this purpose they sliall at all times have ac- 
 cess to all the books, accounts and records of the company 
 and to the minute book and shall be empowered to require 
 from the directors and other officers such information and 
 explanation as may be necessary for the performance of 
 their duties. 
 
 § 101. If the auditors or any one of them think there 
 is just cause to disapprove of any part of the said accounts 
 presented to the members of the company, they or any one 
 of them may disallow any part of the said accounts so dis- 
 approved of and shall report their or his disapproval in 
 writing on the accounts and balance sheet. 
 
 § 102. Every such reix)rt and balance sheet shall be 
 read before the company in general meeting. 
 
 § 103. Any auditor who shall willfully certify that any 
 false or fraudulent balance sheet or account is correct, shall 
 be civilly responsible to any party injured. 
 
 § 104. The auditors of every company before making 
 a report pursuant to the last preceding section shall re- 
 quire, and the directors and president of the company shall 
 without unnecessary delay supply to the audit(n's,*a bal- 
 ance sheet, in this act referred to as the private balance 
 sheet, giving the details on which the stockholders' balance 
 sheet is founded and showing amongst other things the 
 amount of deductions, if any, for debts considered to be 
 bad or doubtful. 
 
 § 105. The private balance sheet mast be signed b^^ 
 the president and by at least two of the directors of the 
 company when there are not more than three directoi-s, and 
 by three at least when there are more than three directors. 
 
 § 106. The auditors may recjuin' tlic directors and 
 president of the company to supply in writing, signed as 
 hereinbefore provided, any furthci- details or infonnation 
 affecting the balance sheet or any particular item com- 
 
436 BUSINESS ORGANIZATION DOCUMENTS 
 
 prised therein, and shall sign a certificate at the foot of the 
 private balance sheet stating whether or not all their req- 
 uisitions as auditors have been complied with. 
 
 § 107. The private balance sheet shall not be issued to 
 the members of the company, but shall together with all 
 such further details and infoimation as aforesaid be kept 
 by the directors as part of the records of the company. 
 
 14. Annual Report. 
 
 § 108. Every corporation organized under this act 
 shall annually file in the office of the secretary of state for 
 use of the comptroller and other state officials acting in 
 their official capacity, but not for public inspection, and also 
 in the registered office of the company, a report, which said 
 report shall be at all times open to the inspection of the 
 stockholders, upon request, and a copy of such report shall 
 be furnished to any stockholder by the corporation upon 
 the pre-payment of a reasonable charge for making the 
 same, which charge shall not exceed the sum of ten cents 
 per folio of one hundred words. 
 
 § 109. Said report shall be filed within three months 
 after the first of January in each year; shall be authenti- 
 cated by the signatures of the president and one other of- 
 ficer of the company, or by any two directors and shall 
 contain: 
 
 1. The name of the corporation. 
 
 2. The location, town or city, with street and number, 
 if any there be, of its registered office, with the name of the 
 registered agent. 
 
 3. The names of all the directors and officers of the 
 company and the date of the expiration of their terms of 
 office. 
 
 4. The post-office address of each, not the registered of- 
 fice of the company. 
 
 5. The character of business carried on by the com- 
 pany. 
 
CORPORATION ACTS 437 
 
 6. Tlio location of any and all transfer oiTices within 
 and outside the state. 
 
 7. Tlie last shareholders' halanee sheet. 
 
 8. The day appointed for the next annual nieetinc^ of 
 the stockholders for the election of directors. 
 
 § 110. In case any corporation shall fail to comply 
 with the provisions of this act regarding the annual report, 
 the corporation shall forfeit to the state three hundred 
 dollars, to be recovered with costs in an action of debt, to 
 be prosecuted by the Attorney-General, whose duty it shall 
 be to prosecute all such actions whenever it shall appear 
 that this section has been violated. 
 
 § 111. If such report be not so made and filed before 
 the time appointed for the holding of the next annual elec- 
 tion by the stockholders, all of the directors of any such 
 domestic corporation in office during the default shall at 
 the time ajopointed for the next election, and for a period 
 of one year thereafter, be thereby rendered ineliirible for 
 election or appointment to any office in the company as di- 
 rectors or otherwise. 
 
 § 112. No director shall be thus disqualified for the 
 failure to make and file such report if he shall file with the 
 secretary of state within thirty days after the first day of 
 April a certificate stating that he has endeavored to have 
 such report made and filed, but the officers have neglected 
 to make and file the same, and shall repoi*t the items re- 
 quired to be stated in such annual re})oi-t so far as they are 
 within his knowledge, or are ol)taiiiable from sources of 
 Such information open to him, verified by him to be true to 
 the best of his knowledge, information and belief. 
 
 § 113. The secretary of state shall upon a])plication 
 furnish blanks in proper fonn and shall safely keep in his 
 office all such statements, and issue to the corporations 
 filing the same his certificate therefor. 
 
438 BUSINESS ORGANIZATION DOCUMENTS 
 
 15. Merger. 
 
 § 114. Any two or more corporations organized or to 
 be organized under this act for the purpose of canying on 
 any kind of business may merge or consolidate into a single 
 corporation, which may be either one of said merging or 
 consolidating corporations, or a new corporation to be 
 fomied by means of such merger and consolidation; but the 
 provisions of this act relative to merger and consolidation 
 shall not apply to any company organized under the in- 
 surance, banking or transportation laws. 
 
 § 115. The consolidation or merger shall be made 
 under the conditions, provisions, restrictions, and with the 
 powers hereinafter mentioned: 
 
 1. The directors of the several corporations proposing 
 to merge or consolidate may enter into a joint agreement 
 under the corporate seals of the respective corporations, 
 for the merger or consolidation of said corporations, and 
 prescribing the terms and conditions thereof, the mode of 
 carrjdng the same into effect, the name of the new corpora- 
 tion, if one shall be so formed or created, or of the consoli- 
 dated corporation, as the case may be; the number, names 
 and places of residence of the first directors and officers of 
 such new or consolidated corporation who shall hold their 
 offices until their successors be chosen or appointed, either 
 according to law or according to the by-laws of the said 
 corporation; the number of shares of the capital stock, 
 whether common or preferred, and the amount or par value 
 of each share of such new or consolidated corporation; and 
 the manner of converting the capital stock of each of said 
 merging or consolidating corporations into the stock or obli- 
 gations of such new or consolidated corporation, and in 
 case of the creation of a new corporation, how and when the 
 directors and officers shall be chosen or appointed; together 
 with all such other provisions and details as such first-men- 
 tioned directors shall deem necessary to perfect the merger 
 
CORPORATION ACTS 439 
 
 or consolidation of said oorporatioii, or as aro required fur 
 the formation of any new corporation under this act. 
 
 2. The agreement shall be submitted to the stockhold- 
 ers of each of said mevii:inc^ or consolidating^ cor])* (rations, 
 separately, at a meetinf^ thereof, to be called for the pur- 
 pose of taking the same into consideration; and twenty 
 days' notice of the time, place and object of such meeting 
 shall be mailed to the last-known post-office address of each 
 of such stockholders; and at the said meotinji^s of stock- 
 holders the said agreement of such directors shall be con- 
 sidered, and a vote of the stockholders of each corpora- 
 tion by ballot shall be taken separately, for the adoption or 
 rejection of the same, each share of stock entitling the 
 holder thereof to one vote, and said ballots shall be cast in 
 person or by proxy; and if the votes of the holders of two- 
 thirds of all the capital stock of each of the said merging 
 or consolidating corporations shall be for the adoption of 
 said agreement, that fact shall be certified thereon by the 
 secretaiy of each of the respective corporations, under the 
 seal thereof, and the agreement, so adopted and so certified, 
 shall be filed in the office of the secretary of state, and shall 
 from thence be deemed and taken to be the agreement and 
 act of merger or consolidation of the said corporations, and 
 a copy of said agreement and act of merger or consolidation, 
 duly certified by the secretary of state under the seal there- 
 of, shall be evidence of the existence of such new or con- 
 solidated corporation. Copies of said agreement and act 
 of merger shall be filed also in the registered office of the 
 consolidated coi'poration. 
 
 § 116. Upon making and perfecting the said agree- 
 ment and act of merger or consolidation, and filing the same 
 in the office of the secretary of state, the several corpora- 
 tions shall be one corporation, by the name provided in said 
 agi'eement in case a new corporation shall be created there- 
 by, or by the name of the consolidated corporation into 
 which said other contracting corporation or corporations 
 
440 BUSINESS ORGANIZATION DOCUMENTS 
 
 shall be so merged or consolidated, as the case may be, and 
 possessing all the rights, privileges, powers and fran- 
 chises, as well of a public as of a private nature, and being 
 subject to all the restrictions, disabilities and duties of each 
 of such corporations so merged or consolidated, except as 
 altered by the provisions of this act. 
 
 § 117. Upon the consummation of said act of merger 
 or consolidation, all the rights, privileges, powers and fran- 
 chises of each of said corporations, and all property, real, 
 personal and mixed, and all debts due on w^hatever ac- 
 count, as w^ell for stock subscriptions as all other things 
 in action or belonging to each of such corporations, shall 
 be vested in the consolidated corporation; and all prop- 
 erty, rights, privileges, powers and franchises, and all and 
 every other interest shall be thereafter as effectually the 
 property of the consolidated corporation as they were of 
 the several and respective former corporations, and the 
 title to any real estate, whether by deed or otherwise, un- 
 der the laws of this state, vested in either of such corpora- 
 tions, shall not revert or be in any way impaired by reason 
 of this act; provided, that all rights of creditors and all 
 liens upon the property of either of said former corpora- 
 tions shall be preserved unimpaired, and the respective 
 former corporations may be deemed to continue in ex- 
 istence, in order to preserve the same; and all debts, 
 liabilities, and duties of either of said former corporations 
 shall thenceforth attach to said consolidated corporation, 
 and may be enforced against it to the same extent as if 
 said debts, liabilities and duties had been incurred or con- 
 tracted by it. 
 
 § 118. If of any of the corporations so authorized to 
 merge or consolidate any stockholder not voting in favor 
 of such agreement shall dissent therefrom and shall refuse 
 or neglect to convert his stock into the stock of such con- 
 solidated corporation, or to dispose thereof in the manner 
 and on the terms specified in such agreement, such dis- 
 
CORPORATION ACTS 441 
 
 sentin^ stoekholdor or snoli consolidated corporation may, 
 at any time within thirty days after the adoption and filing,' 
 of the as^reement of consolidation, a])ply by petition to tlif 
 supreme court in the county in which the rej]jistered office 
 of the corporation whose stockholders shall so dissent or 
 neglect, was or is located, on reasonable notice to be pre- 
 scribed by said couii; to said consolidated corporation, or 
 to such dissenting- stockholder, as the case may be, for the 
 appointment of three disinterested appraisers to appraise 
 the full market value of his stock, without regard to an}^ 
 depreciation or appreciation thereof in consequence of the 
 said merger or consolidation, and whose award, or that of 
 a majority of them, when confinned by the said court, 
 shall be final- and conclusive on all parties, and said con- 
 solidated corporation shall pay to such stockholder in cash 
 the value of his stock as aforesaid; and on receiving such 
 ])ayment, or on a tender thereof, or in case of any legal 
 disability or absence from the state, on the payment of 
 such award into said court, said stockholder shall trans- 
 fer his stock to the said consolidated corporation to be dis- 
 posed of by the directors thereof, or to be retained for the 
 benefit of the remaining stockholders; and in case the said 
 award is not so paid within thirty days from the filing of 
 said award and confinnation by said court, and notice 
 thereof to be given in the manner aforesaid unto said stock- 
 holder or said consolidated corporation, the amount of th(,' 
 award shall be a judgment against said corporation, and 
 may be collected as other judgments in said court are by 
 law collectible. 
 
 § 119. When two or more corporations are merged or 
 consolidated the consolidated corporation shall have power 
 and authority to issue bonds or other obligations, nego- 
 tiable or otherwise, and with or without coupons or inter- 
 est certificates thereto attached, to an amount sufficient 
 with its capital stock to provide for all the payments it will 
 be required to make or obligations it will be required to 
 
442 BUSINESS ORGANIZATION DOCUMENTS 
 
 assume, in order to effect such merger or consolidation; to 
 secure the payment of which bonds or obligations it shall 
 be lawful to mortgage its corporate franchises, rights, 
 privileges and property, real, personal and mixed; pro- 
 vided, such bonds shall not bear a greater rate of interest 
 than six per centum per annum; the consolidated corpora- 
 tion may purchase, acquire, hold and dispose of the stocks 
 of other corporations of this state or elsewhere, and exer- 
 cise in respect thereto all the powers of stockholders there- 
 of, and may issue capital stock, either common or pre- 
 ferred, or both, to such an amount as may be necessary, 
 to the stockholders of such merging or consolidating cor- 
 porations in exchange or payment for their original shares, 
 in the manner and on the terms specified in the agreement 
 of merger or consolidation; which may fix the amount and 
 provide for the issue of preferred stock based on the prop- 
 erty or stock of the merging or consolidating corporations 
 conveyed to the consolidated corporation, as well as upon 
 money capital paid in; but all the provisions of this act af- 
 fecting single corporations regarding filing of contracts in 
 accordance with which stock is issued, making of reports 
 and all other particulars shall apply to a corporation formed 
 by merger or consolidation. 
 
 16. Dissolution. 
 
 § 120. The incorporators named in any certificate of 
 incorporation, before the paj^ment of any part of the capi- 
 tal, and before beginning the business for which the cor- 
 poration was created, may surrender all their corporate 
 rights and franchises, by filing in the office of the secretary 
 of state a certificate, verified by oath, that no part of the 
 capital has been paid, that such business has not been be- 
 gun, and that they surrender all rights and franchises. 
 Thereupon the said corporation shall be dissolved. 
 
 § 121. Wlienever in the judgment of two-thirds of 
 the board of directors, it shall be deemed advisable and 
 
CORPORATION ACTS 443 
 
 most for the benefit of such corporation that it should be 
 dissolved, the board within ten days after the adoption of a 
 resolution to that effect ])y two-thirds of the whole board 
 at any meeting called for that purpose, of which meetinf^ 
 every director shall have received at least three days' 
 notice, shall cause notice of the adoption of such resolu- 
 tion to be mailed to each stockholder residing in the United 
 States, and also beginning within said ten days cause a like 
 notice to be published in a newspaper published in the 
 county wherein the corj^oration shall have its principal of- 
 fice, at least four weeks successively, once a week next pre- 
 ceding the time aj^pointed for the same, of a meeting of the 
 stockholders to be held at the office of the corporation, to 
 take action upon the resolutions so adopted by the board of 
 directors, which meeting shall be held between the hours 
 of ten o'clock in the forenoon and three o'clock in the after- 
 noon of the day so named, and wiiich meeting may, on the 
 day so appointed, by consent of a majority in interest of 
 the stockholders present, be adjourned from time to time 
 for not less than eight days at any one time, of which ad- 
 journed meeting notice by advertisement in said newspaper 
 shall be given; and if at any such meeting two-thirds in 
 interest of all the stockholders shall consent that a dissolu- 
 tion shall take place and signify their consent in writing, 
 such consent, together with a list of the names and resi- 
 dences of the directors and officers, certified ])y the presi- 
 dent and the secretary or treasurer, shall be filed in the of- 
 fice of the secretary of state, who upon being satisfied by 
 due proof that the requirements aforesaid have been com- 
 plied with, shall issue a certificate that such consent has 
 been filed, and the board of directors shall cause such certif- 
 icate to be pul)lished four weeks successively, at least once 
 a week, in a newspaper pul)lished in said county; and upon 
 filing in the office of the secretary of state of an affidavit 
 that said certificate has been so published, the corporation 
 shall be dissolved and the board shall proceed to settle up 
 
444 BUSINESS ORGANIZATION DOCUMENTS 
 
 and adjust its business and affairs; until all the debts of the 
 corporation are paid the members of the board are to be held 
 responsible for the proper management of its affairs, as if 
 no provision had been made for dissolution; whenever all 
 the stockholders shall consent in writing to a dissolution, 
 no meeting or notice thereof shall be necessary, but on fil- 
 ing said consent in the ofSce of the secretary of state he 
 shall forthwith issue a certificate of dissolution, which shall 
 be published as above provided. 
 
 § 122. All corporations, whether they expire by their 
 own limitation or be annulled by the legislature or other- 
 wise dissolved, shall be continued bodies corporate for the 
 purpose of prosecuting and defending suits by or against 
 them, and of enabling them to settle and close their af- 
 fairs, to dispose of and convey their property and to divide 
 their capital, but not for the purpose of continuing the 
 business for which they were established. 
 
 17. Repeal: Act in Force. 
 
 § 123. Nothing in this act shall be construed to repeal 
 any of the provisions of the existing laws of this state re- 
 garding monopoly or the formation of monopolies. 
 
 § 124. This act shall take effect immediately. 
 
IV. CHARTERS. 
 
 (A)— CERTIFICATE OF INCORPORATION OF THE 
 MARSTON MANUFACTURING COMPANY.* 
 
 Wc, the undersigned, all being of full age and two- 
 thirds being citizens of the United States, and one of us 
 a resident of the State of New York for the purpose of 
 fomiing a Corporation under the Business Corporations 
 Law of the State of New York, do hereby certify and set 
 forth: 
 
 First — The name of said Corporation shall be 
 ^'Marston Manufacturing Company." 
 
 Second — The purposes for which said Corporation is 
 formed are as follows: 
 
 1. To buy, sell, manufacture and generally deal in 
 all manner of tools, machinery, devices, appliances and 
 supplies used in the cooper's trade. 
 
 2. To lease, buy, sell, use and hold all such prop- 
 erty, real or personal, as may be necessary or conven- 
 ient in connection with the said business. 
 
 3. To do any or all things set forth in this certificate 
 as objects, purposes, powers or otherwise, to the same 
 extent and as fully as natural persons might do, and in 
 any part of the world. 
 
 Tliird— The amount of Capital Stock of said Corpora- 
 tion shall be Fifty Thousand (-$50,000) Dollars. 
 
 Fourth — Tlie number of shares composing said capital 
 stock shall be Five Hundred (500) Shares of the par value 
 of One Hundred ($100) Dollai^ each, and the amount of 
 capital with which said Corporation will begin business 
 is Five Hundred ($500) Dollars. 
 
 Fifth — Tlie principal business office of said Corporation 
 
 ♦From Conyngton's Manual of Corporate Management 
 
446 BUSINESS ORGANIZATION DOCUMENTS 
 
 shall be in the Borough of Manhattan, in the City, County; 
 and State of New York. 
 
 Sixth — The duration of said Corporation shall be per- 
 petual. 
 
 Seventh— The number of directors of said Corporation 
 
 shall be three. 
 
 Eighth — The names and post-office addresses of the di- 
 rectors of said Corporation for the first year are as fol- 
 lows: 
 
 Names. Addresses. 
 
 Morris P. Marston No. 165 Grand Ave., Brooklyn, N. Y. 
 John Adams No. 30 Broad St., New York City. 
 
 Henry Cornell Little Falls, New Jersey. 
 
 Ninth — The names and post-office addresses of the sub- 
 scribers to this certificate, and the number of shares of 
 stock which each agrees to take in said Corporation, are 
 as follows : 
 
 Names. Addresses. Shares. 
 
 Morris P. Marston No. 165 Grand Ave., Brooklyn, N. Y. 25 
 John Adams No. 30 Broad St., New York City 10 
 
 Henry Cornell Little Falls, New Jersey. 10 
 
 William B. Ames Singac, New Jersey. 5 
 
 Tenth— Pursuant to Section 40 of the Stock Corpora- 
 tion Law, as amended, this Corporation shall have power 
 to purchase, acquire, hold and dispose of the stocks, bonds, 
 and other evidences of indebtedness of any corporation, do- 
 mestic or foreign, and issue in exchange therefor its stock, 
 bonds or other obligations. 
 
 In Witness Whereof, we have made and signed this cer- 
 tificate in duplicate this fourteenth day of January, 
 one thousand nine hundred and three. 
 
 State of New York 
 County of New York 
 
 Morris P. Marston. 
 ss.: John Adams. 
 
 Henry Cornell. 
 William B. Ames. 
 
CHARTER OF THE STEEL CORPORATION 447 
 
 Personally appeared before me this 14th da}- of Janu- 
 ary, 1903, Morris P. Marston, John Adams, Ilciiry rornell 
 and William B. Ames, to me personally known to be the 
 ])ersons described in and who executed the foregoinp^ cer- 
 tificate, and severally acknowled^ced that they executed 
 the same for the purposes therein set forth. 
 
 8eth Lawson 
 (Notarial) Notary Public for New York Pounty. 
 
 ( Seal ) 
 
 (B)— CHARTER OF THE UNITED STATES STEEL 
 
 CORPORATION. 
 
 Certificate of Amendment of Original Certificate of 
 Incorporation. 
 
 United States Steel Corporation, a corporation of the 
 State of New Jersey, and the President and the Secretary 
 of said Company, do hereby certify as follows : 
 
 1. (Here follows the location of the principal office in 
 New Jersey, and the name of the agent therein and in 
 charge thereof.) 
 
 2. The total authorized capital stock of said corpora- 
 tion, as set forth in its original certificate of incorporatimi, 
 is $3,000, divided into 30 shares of the par value of $100 
 each, of which 15 shares of the aggregate par value of $1,500 
 are to be preferred stock, and 15 shares of the aggregate par 
 value of $1,500 are to be common stock. Such total author- 
 ized capital stock, consisting of 15 shares of the preferred 
 stock and 15 shares of the common stock, of the aggregate 
 par value of $3,000, was subscribed for by the incorpora- 
 tors as set forth in the said original certificate of incorpora- 
 tion. 
 
 3. The Board of Directors of said corporation, at a 
 meeting of said Board duly held, passed a resolution de- 
 claring that the changes and amendments hereinafter set 
 forth are advisable, and calling a meeting of the stock- 
 holders to take action thereon. 
 
448 BUSINESS ORGANIZATION DOCUMENTS 
 
 4. Such meeting of the stockholders was thereupon 
 duly held pursuant to such call of the Board of Directors, 
 upon notice given to each stockholder as provided in the 
 by-laws. At said meeting all of the incorporators and 
 stockholders of said corporation were personally present, 
 and more than two-thirds in interest of each class of the 
 stockholders having voting powers — namely, all of the in- 
 corporators and all of the stockholders of said corporation 
 — voted in favor of such changes and amendments, which 
 were accordingly adopted. Such changes and amend- 
 ments are as follows: 
 
 A. That Article IV of the Certificate of Incorporation 
 of said company be amended so as to read as follows: 
 
 IV. The total authorized capital stock of the corpora- 
 tion is eleven' hundred million dollars ($1,100,000,000), di- 
 vided into eleven million shares of the par value of one 
 hundred dollars each. Of such total authorized capital 
 stock, five million five hundred thousand shares, amount- 
 ing to five hundred and fifty million dollars, shall be pre- 
 ferred stock, and five million five hundred thousand shares, 
 amounting to five hundred and fifty million doUars, shall be 
 common stock. 
 
 From time to time the preferred stock and the com- 
 mon stock may be increased according to laAv, and may be 
 issued in such amounts and proportions as shall be deter- 
 mined by the Board of Directors and as may be permitted 
 by law. 
 
 The holders of the preferred stock shall be entitled to 
 receive, when and as declared, from the surplus or net 
 profits of the corporation yearly dividends at the rate of 
 seven per centum per annum, and no more, payable quar- 
 terly on dates to be fixed by the by-laws. The dividends 
 on the preferred stock shall be cumulative, and shall be 
 payable before any dividend on the common stock shall l)e 
 paid or set apart; so that if in any year dividends amount- 
 ing to seven per cent shall not have been paid thereon, the 
 
CHARTER OF THE STEEL CORPORATION 449 
 
 deficiency shall be paya])le before ;my dividends shall be 
 paid u])on or set a])art for the common stock. 
 
 Whenever all cnnmlative dividends on the preferred 
 stock for all previons years shall have been declared, and 
 shall have become payal)le, .-iiul the accrned qnarterly in- 
 stallments for the cnrrent year shall have been declared, 
 and the company shall have paid such cumulative dividends 
 for previous years and such accrued quarterly installments, 
 or shall have set aside from its surplus or net profits a sum 
 sufficient for the payment thereof, the Board of Directors 
 may declare dividends on the common stock, payable then 
 or thereafter, out of any remainini,^ surplus or net profits. 
 
 In the event of any liquidation or dissolution or wind- 
 ing up (whether voluntary or involuntary) of the corpora- 
 tion, the holders of the preferred stock shall be entitled 
 to be paid in full lioth the par amount of their shares and 
 the unpaid dividends accrued thereon before any amount 
 shall be paid to the holders of the common stock; and after 
 the payment to the holders of the preferred stock of its par 
 value and the unpaid accrued dividends thereon, the re- 
 maininc^ assets and funds shall be divided and paid to the 
 holders of the conunon stock according to their respective 
 shares. 
 
 And that the capital stock of said Company be increased 
 accordin.rrly to $1,100,000,000, divided into 11,000,000 
 shares of the par value of $100 each, of which amount 5,500,- 
 000 shares amounting to $550,000,000 shall be prefeiTed 
 stock, with th(> i-ights and preferences aforesaid, and 5,- 
 500,000 shares amounting to $550,000,000 shall be conmiou 
 stock. 
 
 B. That the fifth paragraph of Article YTL of the said 
 certificate of incorporation be amended so as to read as 
 follows : 
 
 Unless authorized by votes given in person or by proxy 
 by stockholdei-s holding at least two-tliii"ds of the capital 
 stock of the corporation, which is rciH'cscntcd and voted 
 
 B— II— 23 
 
450 BUSINESS ORGANIZATION DOCUMENTS 
 
 upon in person or by proxy at a meeting specially called for 
 that purpose, or at an annual meeting, the Board of Di- 
 rectors shall not mortgage or pledge any of its real prop- 
 erty, or any shares of the capital stock of any other cor- 
 poration; but this prohibition shall not be construed to 
 apply, to the execution of any purchase-money mortgage 
 or any other purchase-money lien. 
 
 As authorized by the Act of the Legislature of the State 
 of New Jersey, passed March 22, 1901, amending the seven- 
 teenth section of the Act Concerning Corporations (Re- 
 vision of 1896), any action which theretofore required the 
 consent of the holders of two-thirds of the stock, at any 
 meeting after notice to them given, or required their con- 
 sent in writing to be filed, may be taken upon the consent 
 of, and the consent given and filed by, the holders of two- 
 thirds of the stock of each class represented at such meet- 
 ing in person or by proxy. 
 
 C. That the certificate of incorporation of said United 
 States Steel Corporation, as amended, shall read as follows : 
 
 AMENDED 
 
 Certificate of Incorporation 
 
 of 
 
 United States Steel Corporation. 
 
 We, the undersigned, in order to form a corporation for 
 the purposes hereinafter stated, under and pursuant to 
 the provisions of the Act of the Legislature of the State of 
 New Jersey, entitled "An Act concerning Corporations 
 (Revision of 1896)," and the acts amendatory thereof and 
 supplemental thereto, do hereby certify as follows: 
 
 I. The name of the Corporation is 
 
 United States Steel Corporation. 
 
 II. (Here follows the location of the principal office in 
 New Jersey, and the name of the agent therein and in 
 charge thereof.) 
 
CHARTER OF THE STEEL CORPORATION 451 
 
 III. The objects for which the corporation is formed 
 are: 
 
 To manufacture iron, steel, manejanese, coke, copper, 
 lumber and other materials, and all or any articles consist- 
 ing, or partly consisting, of iron, steel, copper, wood or 
 other materials, and all or any products thereof. 
 
 To acquire, own, lease, occupy, use or develop any lands 
 containing coal or iron, manganese, stone or other ores, or 
 oil, and any wood lands, or other lands for any purpose of 
 the company. 
 
 To mine or othenvise to extract or remove, coal, ores, 
 stone and other minerals and timber from any lands owned, 
 acquired, leased or occupied by the Company, or from any 
 other lands. 
 
 To buy and sell, or otherwise to deal or to traffic in iron, 
 steel, manganese, copper, stone, ores, coal, coke, wood, lum- 
 ber and other materials, and any of the products thereof, 
 and any articles consisting or partly consisting thereof. 
 
 To construct bridges, buildings, machinery, ships, 
 boats, engines, cars and other equipment, railroads, docks, 
 ships, elevators, water works, gas works, and electric works, 
 viaducts, aqueducts, canals and other watenvays, and any 
 other means of transportation, and to sell the same, or 
 otherwise to dispose thereof, or to maintain and operate 
 the same, except that the Company shall not maintain or 
 operate any railroad or canal in the State of New Jersey. 
 
 To apply for, obtain, register, purchase, lease or other- 
 wise to acquire, and to hold, use, own, operate and intro- 
 duce, and to sell, assign or otherwise to dispose of, any 
 trade-marks, trade-names, patents, inventions, improve- 
 ments and processes used in eonnection with or secured un- 
 der letters patent of the United States, or elsewhere or 
 otherwise, and to use, exercise, develop, grant licenses in 
 respect of, or otherwise to tura to account any such trade- 
 marks, patents, licenses, processes and the like, or any 
 such property or rights. 
 
452 BUSINESS ORGANIZATION DOCUMENTS 
 
 To engage in any other manufacturing, mining, con- 
 struction or transportation business of any kind or char- 
 acter whatsoever, and to that end to acquire, hold, own and 
 dispose of any and all property, assets, stocks, bonds and 
 rights of an}^ and every kind, but not to engage in any 
 business hereunder which shall require the exercise of the 
 right of eminent domain within the State of New Jersey. 
 
 To acquire by purchase, subscription or otherwise, and 
 to hold or to dispose of stocks, bonds or any other obliga- 
 tions of any corporation formed for, or then or theretofore 
 engaged in or pursuing, any one or more of the kinds of 
 business, purposes, objects or operations above indicated, 
 or owning or holding an}^ property of any kind herein 
 mentioned, or of any corporation owning or holding the 
 stocks or the obligations of any such corporation. 
 
 To hold for investment, or otherwise to use, sell or dis- 
 pose of, any stock, bonds or other obligations of any such 
 other corporation; to aid in any manner any corporation 
 whose stock, bonds or other obligations are held or in any 
 manner guaranteed by the Companj^, and to do any other 
 acts or things for the preservation, protection, improve- 
 ment or enhancement of the value of any such stock, bonds 
 or other obligations, or to do any acts or things designed 
 for any such purpose; and, while OTSTier of any such stock, 
 bonds or other obligations, to exercise all the rights, powers 
 and privileges of ownership thereof, and to exercise any 
 and all voting power thereon. 
 
 The business or purpose of the Company is from time to 
 time to do any one or more of the acts and things herein set 
 forth; and it may conduct its business in other States, and 
 in the Territories, and in foreign countries, and may have 
 one office, or more than one office, and keep the books of 
 the Company outside of the State of New Jersey, except as 
 otherwise may be provided by law; and may hold, pur- 
 chase, mortgage and convey real and personal property, 
 either in or out of the State of New Jersey. 
 
CHARTER OF THE STEEL CORPORATION 453 
 
 Without in any particular liniitint,^ any of the objects 
 and powers of the corporation, it is hereby expressly de- 
 clared and provided that the coriioration shall have power 
 to issue bonds and other obli,<,^ations in payment for prop- 
 erty purchased or acquired by it, or for any other object 
 in or about its business; to mortgage or pledge any stocks, 
 bonds or other obligations, or any property which may be 
 acquired by it, to secure any bonds or other obligations by 
 it issued or incurred; to guarantee any dividends, or bonds, 
 or contracts, or other obligations; to make and perform con- 
 tracts of any kind and description and in carrying on its 
 business, or for the purpose of attaining or furthering any 
 of its objects, to do any and all other acts and things, and to 
 exercise any and all other powers which a copartnership or 
 natural person could do and exercise, and which now or 
 hereafter may be authorized by law. 
 
 IV. The total authorized capital stock of the corpora- 
 tion is eleven hundred million dollars ($1,100,000,000), di- 
 vided into eleven million shares of the par value of one hun- 
 dred dollars each. Of such total authorized capital stock, 
 five million five hundred thousand shares, amounting to five 
 hundred and fifty million dollars, shall be preferred stock, 
 and five million five hundred thousand shares, amounting to 
 five hundred and fifty million dollars, shall be common 
 stock. 
 
 From time to time, the jn-eferred stock and the common 
 stock may be increased according to law, and may be issued 
 in such amounts and ]n'oportions as shall be determined 
 by the Board of Directoi-s, and as may be ])ermitted by law. 
 
 The holders of the preferred stock shall be entitled to re- 
 ceive when and as declared, from the sun)lus or net profits 
 of the corporation, yearly dividends at the rate of seven per 
 centum per annum, and no more, payable quarterly on 
 dates to be fixed ])y the by-laws. The dividends on the pre- 
 ferred stock shall be cumulative, and shall be ])ayablc be- 
 fore any dividend on the common stock shall be paid or set 
 
454 BUSINESS ORGANIZATION DOCUMENTS 
 
 apart; so that, if in any year dividends amounting to seven 
 per cent shall not have been paid thereon, the deficiency 
 shall be payable before any di^ddends shall be paid npon 
 or set apart for the common stock. 
 
 Whenever all cumulative dividends on the preferred 
 stock for all previous years shall have been declared and 
 shall have become payable, and the accrued quarterly in- 
 stallments for the current year shall have been declared, 
 and the Company shall have paid such cumulative divi- 
 dends for previous years and such accrued quarterly install- 
 ments, or shall have set aside from its surplus or net profits 
 a sum sufficient for the payment thereof, the Board of Di- 
 rectors may declare dividends on the common stock, pay- 
 able then or thereafter, out of any remaining surplus or net 
 profits. 
 
 In the event of any liquidation or dissolution or wind- 
 ing up (whether voluntary or involuntary) of the corpora- 
 tion, the holders of the preferred stock shall be entitled to 
 be paid in full both the par amount of their shares and the 
 unpaid dividends accrued thereon, before any amount shall 
 be paid to the holders of the common stock; and after the 
 payment to the holders of the preferred stock of its par 
 value, and the unpaid accrued dividends thereon, the re- 
 maining assets and funds shall be divided and paid to the 
 holders of the common stock according to their respective 
 shares. 
 
 V. The names and post-office addresses of the incorpor- 
 ators, and the number of shares of stock for which sever- 
 ally and respectively we do hereby subscribe (the aggre- 
 gate of our said subscriptions being three thousand dollars, 
 is the amount of capital stock with which the corporation 
 will commence business), are as follows: 
 
 (Here follow the names and post-office addresses of each 
 of the incorporators, and the number of shares of stock sub- 
 scribed for by each.) 
 
 VI. The duration of the corporation shall be perpetual. 
 
CHARTER OF THE STEEL CORPORATION 455 
 
 VTI. Tlio iinmbcr of Directors of tlio Company shall be 
 fixed from time to time by the by-laws; but the num})or, if 
 fixed at more than three, shall be some multiplr of three. 
 The Directors shall be classified with resp('(.'t to the time for 
 which they shall severally hold office by dividing them into 
 three classes, each consisting of one-third of the whole 
 nmnber of the Board of Directors. The Directors of the 
 first class shall be elected for a term of one year; the Di- 
 rectors of the second class for a term of two years; and 
 the directors of the third class for a term of three years; 
 and at each annual election the successors to the class of 
 Directors whose terms shall expire in that year shall be 
 elected to hold office for the term of three years, so that the 
 term of office of one class of Directors shall expire in each 
 year. 
 
 The number of the Directors may be increased as may 
 be provided in the by-laws. In case of any increase of the 
 number of the directors the additional Directors shall be 
 elected as may be pro\^ded in the by-laws by the Directors 
 or by the Stockholders at an annual or special meeting; and 
 one-third of their number shall l)e elected for the then unex- 
 pired portion of the tcnn of the Directors of the first class, 
 one-third of their number for the unexpired portion of the 
 term of the Directors of the second class, and one-third of 
 their number for the unexpired portion of the tenn of the 
 Directors of the third class, so that each class of Directors 
 shall 1)0 increased equally. 
 
 In case of any vacancy in any class of Directors through 
 death, resignation, disqualification or other cause, the re- 
 mainim:^ Directors, by affirmative vote of a majority of the 
 Board of Directors, may elect a successor to hold office for 
 the unexpired portion of the term of the Director whose 
 place shall be vacant, and until the election of a successor. 
 
 The Board of Directors shall have power to hold their 
 meetings outside of the State of New Jersey at such places 
 as from time to time may be designated by the by-laws or 
 
456 BUSINESS ORGANIZATION DOCUMENTS 
 
 by resolution of the Board. The by-laws may prescribe the 
 number of Directors necessary to constitute a quorum of 
 the Board of Directors, which number may be less than a 
 majority of the whole number of the Directors. 
 
 Unless authorized by votes given in person or by proxy 
 by Stockholders holding at least two-thirds of the capital 
 stock of the corporation, which is represented and voted 
 upon in person or by proxy at a meeting specially called for 
 that purpose, or at an annual meeting, the Board of Di- 
 rectors shall not mortgage or pledge any of its real prop- 
 erty, or any shares of the capital stock of any other cor- 
 poration; but this prohibition shall not be construed to ap- 
 ply to the execution of any purchase-money mortgage or 
 any other purchase-money lien. 
 
 As authorized by the Act of the Legislature of the State 
 of New Jersey, passed March 22, 1901, amending the sev- 
 enteenth section of the Act concerning Corporations (Re- 
 vision of 1896), any action which theretofore required the 
 consent of the holders of two-thirds of the stock at any 
 meeting, after notice to them given, or required their con- 
 sent in. writing to be filed, may be taken upon the consent 
 of, and the consent given and filed by the holders of two- 
 thirds of the stock of each class represented at such meet- 
 ing in person or by proxy. 
 
 Any officer elected or appointed by the Board of Di- 
 rectors may be removed at any time by the affirmative vote 
 of a majority of the whole Board of Directors. 
 
 Any other officer or emploj^e of the Company may be 
 removed at any time by vote of the Board of Directors, or 
 by any committee or superior officer upon whom such pow- 
 er of removal may be conferred by the by-laws or by vote 
 of the Board of Directors. 
 
 The Board of Directors, by the affinnative vote of a 
 majority of the whole board, may appoint from the Direct- 
 ors an executive committee, of which a majority shall con- 
 stitute a quorum; and, to such extent as shall be provided in 
 
CHARTER OF THE STEEL CORPORATION 457 
 
 the by-laws, such committee shall have and may exercise 
 all or any of the powere of the Board of Directors, infliidinj]^ 
 power to cause the seal of the corporation to be anix<'d to all 
 papers that may require it. 
 
 The Board of Directors, by the affinnative vote of a ma- 
 jority of the whole board, may appoint any other Standing 
 Committees, and such Standiuij: Committees shall have and 
 may exercise such powers as shall be conferred or author- 
 ized by the bj'-laws. 
 
 The Board of Directors may appoint not only other offi- 
 cers of the Company, but also one or more vice-presidents, 
 one or more assistant treasurers, and one or more assistant 
 secretaries; and, to the extent provided in the by-laws, the 
 persons so appointed respectively shall have and may exer- 
 cise all the powers of the president, of the treasurer and of 
 the secretary respectively. 
 
 The Board of Directors shall have power from time to 
 time to fix and to detei-mine and to vary the amount of the 
 working capital of the Company; and to direct and deter- 
 mine the use and disposition of any surplus or net profits 
 over and above the capital stock paid in; and in its discre- 
 tion the Board of Directors may use and apply any such 
 surplus or accumulated profits in purchasing or acquiring 
 its bonds or other obligations, or shares of its own capital 
 stock, to such extent and in such manner and upon such 
 terms as the Board of Directors shall deem expedient; but 
 shares of such capital stock so purchased or acquired may 
 be resold, unless such shares shall have been retired for 
 the purpose of decreasing the Company's capital stock as 
 provided by law. 
 
 The Board of Directors from time to time sliall deter- 
 mine whether and to what extent, and at what times and 
 places, and under what conditions and regulations, the ac- 
 counts and books of the cor]ioration, or any of tbcm, shall 
 be open to the inspection of the stockholders, and no stock- 
 holder shall have any right to inspect any account or book 
 
458 BUSINESS ORaANIZATION DOCUMENTS 
 
 or document of the corporation, except as conferred by 
 Statute or authorized by the Board of Directors or by a res- 
 okition of the stockholders. 
 
 Subject always to by-laws made by the Stockholders, 
 the Board of Directors may make by-laws,' and, from time 
 to time, may alter, amend or repeal any by-laws; but any 
 by-laws made by the Board of Directors may be altered or 
 repealed by the Stockholders at any annual meeting, or at 
 any special meeting, provided notice of such proposed alter- 
 ation or repeal be included in the notice of the meeting. 
 
 In Witness '\^^lereof, we have hereunto set our hands 
 and seals the 23d day of February, 1901. 
 
 (Signatures of Incorporators.) 
 (Acknowledgment.) 
 
 5. The written assent and signatures of all the Incor- 
 poratoi'S and Stockholders of said United States Steel Cor- 
 poration to the foregoing amendments and changes is here- 
 to appended. 
 
 In Witness Whereof, the said United States Steel Corpo- 
 ration has caused this certificate to be signed by its Presi- 
 dent, and its Secretary, and its corjDorate seal to be hereto 
 affixed, this 1st day of April, 1901. 
 
 (Signatures of President and Secretary, and Corporate 
 
 Seal.) 
 (Acknowledgment.) 
 
 We, the undersigned, being all the Incorporators and 
 Stockholders of the United States Steel Corporation, hav- 
 ing, at a meeting regularly called for that purpose, voted in 
 favor of the changes and amendments set forth in the above 
 certificate, do now, pursuant to law, hereby give our written 
 consent to the said changes and alterations. 
 
 Witness our hands this 1st day of April, A. D. 1901. 
 (Here follow signatures of Incorporators and Stockholders.) 
 (Acknowledgment.) 
 
V. BY-LAWS. 
 
 (A)— BY-LAWS OF THE COLVILLE CARBONATE 
 
 COMPANY.* 
 
 Article I. — Stock. 
 
 1. Certificates of Stock shall be issued in numerical 
 order from the stock certificate book, be signed by the Pres- 
 ident and Treasurer and sealed by the Secretary with the 
 corporate seal. A record of each certificate issued shall 
 be kept on the stub thereof. 
 
 2. Transfers of Stock shall be made only upon the books 
 of the Company and before a new certificate is issued the old 
 certificate must be surrendered for cancellation. The 
 stock books of the Company shall be closed for transfers 
 twenty days before general elections and ten days before 
 dividend days. 
 
 3. The Treasury Stock of the Company shall consist of 
 such issued and outstanding stock of the Company as may 
 be donated to the Comjmny or otherwise acquired, and shall 
 be held subject to disposal l)y the Board of Directoi-s. Such 
 stock shall neither vote nor participate in dividends while 
 held by the Company. 
 
 Article II.— Stockholders. 
 
 1. The Annual fleeting of the stockholders of this 
 Company shall be held in the principal office of the Company 
 in New York City at 12 ^L on the seeoiul Monday in Jan- 
 uary of each year, if not a legal holiday, but if a legal holi- 
 day then on the day following. 
 
 2. Special Meetings of the stockholders may be called 
 at the principal office of the Company at any time by reso- 
 
 *F'om Conyngton's Manual of Corporate Management. Ronald Press, 
 N. Y. 
 
 459 
 
460 BUSINESS ORGANIZATION DOCUMENTS 
 
 lution of the Board of Directors, or upon written request of 
 stockholders holding one-third of the outstanding stock. 
 
 3. Notice of ^leetings, written or printed, for every 
 regular or special meeting of the stockholders, shall be pre- 
 pared and mailed to the last-known post-office address of 
 each stockholder not less than ten days before any such 
 meeting, and if for a special meeting, such notice shall state 
 the object or objects thereof. 
 
 4. A Quorum at any meeting of the stockholders shall 
 consist of a majority of the voting stock of the Company, 
 represented in person or by proxy. A majority of such 
 quorum shall decide any question that may come before 
 the meeting. 
 
 5. The Election of Directors shall be held at the annual 
 meeting of the stockholders and shall, after the first elec- 
 tion, be conducted by two inspectors of election appointed 
 by the President for that purpose. The election shall be by 
 ballot, and each stockholder of record shall be entitled to 
 cast one vote for each share of stock held by him. 
 
 6. The Order of Business at the annual meeting, and, 
 as far as possible, at all other meetings of the stockholders, 
 shall be: 
 
 1. Calling of Roll. 
 
 2. Proof of Due Notice of Meeting. 
 
 3. Reading and Disposal of Any Unapproved Minutes. 
 
 4. Annual Reports of Officers and Committees. 
 
 5. Election of Directors. 
 
 6. Unfinished Business. 
 
 7. New Business. 
 
 8. Adjournment. 
 
 Article III.— Directors. 
 
 1. The Business and Property of the Company shall 
 be managed by a Board of Seven Directors, who shall be 
 stockholders and who shall be elected annually by ballot 
 by the stockholders for the term of one year, and shall 
 serve until the election and acceptance of their duly quali- 
 
CORPORATE BY LAWS 461 
 
 fied successors. Any vacancies may bo filled by the Board 
 for the unexpired temi. Directors shall receive no compen- 
 sation for their soi-x'iees. 
 
 2. The Kegular Mcetin.c^ of the IJoard of Directors 
 shall be held in the principal office of the Company in New 
 York City at 3 p. m. on the third Tuesday of each month, 
 if not a legal holiday, but if a legal holiday then on the day 
 following. 
 
 3. Special Meetings of the Board of Directors to be 
 held in the principal office of the Company in New York 
 City may be called at any time by the President, or by any 
 three members of the Board, or may be held at any time 
 and place, without notice, by unanimous written consent 
 of all the members, or by the presence of all membei*s at 
 such meeting. 
 
 4. Notices of both regular and special meetings shall 
 be mailed by the Secretary to each member of the Board 
 not less than five days before any such meeting, and no- 
 tices of special meetings shall state the purposes thereof. 
 
 5. A Quorum at any meeting shall consist of a major- 
 ity of the entire membership of the Board. A majority 
 of such quorum shall decide any question that may come 
 before the meeting. 
 
 6. Officers of the Company shall be elected by ])allot 
 by the Board of Directors at their first meeting after the 
 election of directors each year. If any office l)ecomes va- 
 cant during the year, the Board of Directoi-s shall fill the 
 same for the unexpired teiTn. The Board of Directoi-s shall 
 fix the compensation of the officers and agents of the Com- 
 pany. 
 
 7. The Order of llusiness at any regular or special 
 meeting of the Board of Directors shall be: 
 
 1. Reading and Disposal of any Unajiproved Minutes. 
 
 2. Reports nf Offieers and Committees. 
 
 3. Unfinished P)Usiness. 
 
 4. New l^>usiness. 
 
 5. Adjournment. 
 
462 BUSINESS ORGANIZATION DOCUMENTS 
 
 Article IV.— Officers. 
 
 1. The Officers of tlie Company shall be a President, 
 a Vice-President, a Secretary and a Treasurer, ayIio shall 
 be elected for one year and shall hold office until their suc- 
 cessors are elected and qualified. The positions of Secre- 
 tary and Treasurer may be united in one person. 
 
 2. The President shall preside at all meetings, shall 
 have general supervision of the affairs of the Company, 
 shall sign or countersign all certificates, contracts and other 
 instruments of the Company as authorized by the Board 
 of Directors; shall make reports to the directors and stock- 
 holders and perform all such other duties as are incident 
 to his office or are properly required of him by the Board 
 of Directors. In the absence or disability of the President, 
 the Vice-President shall exercise all his functions. 
 
 3. The Secretary shall issue notices for all meetings, 
 shall keep their minutes, shall have charge of the seal and 
 the corporate books, shall sign with the President such in- 
 struments as require such signature, and shall make such 
 reports and perform such other duties as are incident to 
 his office, or are properly required of him by the Board of 
 Directors. 
 
 4. The Treasurer shall have the custody of all moneys 
 and securities of the Company and shall keep regular books 
 of accounts and balance the same each month. He shall 
 sign or countersign such instruments as require his signa- 
 ture, shall perform all duties incident to his office or that 
 are properly required of him by the Board, and shall give 
 bond for the faithful perfonnance of his duties in such sum 
 and with such sureties as may be required by the Board 
 of Directors. 
 
 Article V. — Dividends and Finance. 
 
 1. Dividends shall be declared only from the surplus 
 profits at such times as the Board of Directors shall direct, 
 
CORPORATE BY LAWS 463 
 
 and no dividend shall be declared that will imp.iir the 
 capital of the Company. 
 
 2. The Moneys of the Company shall he deposited in 
 the name of the Company in sueh hank or trust conipaii}' 
 as the Board of Directors shall designate, and shall he 
 drawn out only by check signed by the Treasurer and coun- 
 tersigned by the President. 
 
 Article VI.— Seal. 
 
 1. The Corporate Seal of the Company shall consist of 
 two concentric circles, between which is the name of the 
 Company, and in the center shall be inscribed "Incorpor- 
 ated 1903, New York," and such seal, as impressed on the 
 margin hereof, is hereby adopted as the Corporate Seal of 
 the Company. 
 
 Article VII. — Amendments. 
 
 1. These By-Laws may be amended, repealed or altered, 
 in whole or in part, by a majority vote of the entire out- 
 standing stock of the Company, at any regular meeting 
 of the stockholders, or at any special meeting where such 
 action has been announced in the call and notice of such 
 meeting. 
 
 2. The Board of Directors may adopt additional by- 
 laws in hannony therewith, but shall not alter nor repeal 
 any by-laws adopted h}' the stockholders of the Company. 
 
 I hereby certifiy that the foregoing are the By-Laws of 
 the Colville Carbonate Company ado])t('d h\' the stock- 
 holders thereof duly assembled in their first meeting, on 
 the 9th day of March, 190:i, at the onic(> of the CoTn])any, 
 No. 170 Broadway, New York City. 
 
 In Testimony Whereof, I have hereunto affixed my 
 official signature and the corjiorate seal of said 
 corporation on this 10th day of March, 190?,. 
 (Corporate) CIIAKLES E. WAKHEN, 
 
 (Seal) Secretar}\ 
 
464 BUSINESS ORGANIZATION DOCUMENTS 
 
 (B)— BY-LAWS OF UNITED STATES STEEL 
 CORPORATION. 
 
 As on March 1, 1910. 
 
 Article I.— Stockholders. 
 
 Section 1. Annual Meeting. The annual meeting of 
 the stockholders of the Compan}^ shall be held annually at 
 the principal office of the Company in the State of New 
 Jersey, at twelve o'clock noon, on the third Monday in April 
 in each year, if not a legal holiday, and if a legal holiday 
 then on the next succeeding Monday not a legal holiday, for 
 the purpose of electing directors, and for the transaction of 
 such other busmess as may be brought before the meeting; 
 and the terms of office of the directors of the several classes 
 shall continue until the election of their successors at such 
 meeting as provided in Article II hereof. 
 
 It shall be the duty of the Secretary to cause notice of 
 each annual meeting to be published once in each of the four 
 calendar weeks next preceding the meeting in at least one 
 newspaper in each of the following places: Jersey City, 
 N. J., New York, N. Y., Chicago, 111., and Pittsburg, Pa. 
 Nevertheless, a failure to publish such notice, or any irreg- 
 ularity in such notice, or in the publication thereof, shall 
 not affect the validity of any annual meeting, or of any pro- 
 ceedings at any such meeting. 
 
 Section 2. Special Meetings. Special meetings of the 
 stockholders may be held at the principal office of the Com- 
 pany in the State of New Jersey, whenever called in writ- 
 ing, or by vote, by a majority of the Board of Directors. 
 
 Notice of each special meeting, indicating briefly the ob- 
 ject or objects thereof, shall by the secretary be published 
 once in each of the four calendar weeks next preceding the 
 meeting, in at least one newspaper in each of the following 
 places: Jersey City, N. J., New York, N. Y., Chicago, 111., 
 and Pittsburg, Pa. Nevertheless, if all the stockholders 
 
BY-LAWS OF THE STEEL CORPORATION 465 
 
 shall waive notice of a special nieetin^% no notice of snch 
 nieetinji: shall he required; and whenever all tlic stock- 
 holders shall meet in ])erson oi- hy ])i-oxv, such meeting 
 shall bo valid I'ur all purposes without call or notice, and at 
 such meeting any corporate action may be taken. 
 
 Section 3. Q^iorum. At any meeting of the stock- 
 holders the holders of one-third of all of the shares of the 
 capital stock of the Company, present in person or repre- 
 sented by proxy, shall constitute a quorum of the stock- 
 holders for all purposes, unless the representation of a 
 larger number shall be required by law, and, in that case, 
 the representation of the number so required, shall con- 
 stitute a ciuorum. 
 
 If the holders of the amount of stock necessaiy to con- 
 stitute a quorum shall fail to attend in person or by proxy 
 at the time and place fixed hy these by-laws for an annual 
 meeting, or fixed by notice as above provided for a special 
 meeting called by the directors, a majority in interest of the 
 stockholders present in person or by proxy may adjourn, 
 from time to time, without notice other than by announce- 
 ment at the meeting, until holders of the amount of stock 
 requisite to constitute a quorum shall attend. At any such 
 adjounied meeting at which a quorum shall be present, any 
 business may be transacted which might have been trans- 
 acted at the meeting as originally notified. 
 
 Section 4. Orfjaaization. The chainnan of the Board, 
 and in his absence, the chairman of the Finance Connnittee, 
 and in the absence of both, the president, shall call meetings 
 of the stockholders to order, and shall act as chairman of 
 such meetings. The Board of Din^ctors or Finance Com- 
 mittee may a})point any stockholder to act as chainnan of 
 any meeting in the absence of the chairman of the Board 
 and of the chainnan of the Finance Committee and of the 
 president. 
 
 The secretaiy of the Company shall act as secretary at 
 all meetings of the stockholdei-s; but in the absence of the 
 
 B— II— 30 
 
466 BUSINESS ORGANIZATION DOCUMENTS 
 
 secretary at any meeting of the stockholders the presiding 
 officer may appoint any person to act as secretary of the 
 meeting. 
 
 Section 5. Voting. At each meeting of the stockhold- 
 ers, every stockholder shall be entitled to vote in person, 
 or by proxy appointed by instrument in writing, subscribed 
 by such stockholder or by his duly authorized attorney, and 
 delivered to the inspectors at the meeting; and he shall 
 have one vote for each share of stock standing registered in 
 his name at the time of the closing of the transfer books 
 for said meeting. The votes for directors, and, upon de- 
 mand of any stockholder, the votes upon any question be- 
 fore the meeting, shall be by ballot. 
 
 At each meeting of the stockholders, a full, true and 
 complete list, in alphabetical order, of all of the stockhold- 
 ers entitled to vote at such meeting, and indicating the num- 
 ber of shares held by each, certified by the secretary or by 
 the treasurer, shall be furnished. Only the persons in 
 whose names shares of stock stand on the books of the Com- 
 pany at the time of the closing of the transfer books for 
 such meeting, as evidenced by the list of stockholders so 
 furnished, shall be entitled to vote in person or by proxy on 
 the shares so standing in their names. 
 
 Prior to any meeting, but subsequent to the time of clos- 
 ing the transfer books for such meeting, any proxy may 
 submit his powers of attorney to the secretary, or to the 
 treasurer, for examination. The certificate of the secre- 
 tary, or of the treasurer, as to the regularity of such pow- 
 ers of attorney, and as to the number of shares held by the 
 persons who severally and respectively executed such 
 powers of attorney, shall be received as prima facie evi- 
 dence of the number of shares represented by the holder of 
 such powers of attorney for the purpose of establishing 
 the presence of a quorum at such meeting and of organiz- 
 ing the same, and for all other purposes. 
 
 Section 6. Inspectors. At each meeting of the stock- 
 
BY-LAWS OF THE STEEL CORPORATION 467 
 
 holders, the polls shall he oi)eiU'(l and closed, the proxies and 
 ballots shall be received and l)e tak<'n in diaiT^M', and all 
 questions- touching the qualification of voters and the valid- 
 ity of proxies and the acceptance or rejection of votes, shall 
 be decided b}- three inspectors. Such inspectors shall be 
 appointed by the Board of Directors before or at the meet- 
 ing, or, if no such appointment shall have been made, then 
 by the presiding officer at the meeting. Tf for any reason 
 any of the inspectors previously appointed shall fail to at- 
 tend or refuse or be unable to serv^e, inspectors in place of 
 any so failing to attend or refusing or unable to attend, 
 shall be appointed in like manner. 
 
 Article II.— Board of Directors. 
 
 Section 1. Number, Classification and Term of Office. 
 The business and the property of the Company shall be 
 managed and controlled by the Board of Directoi-s. 
 
 As provided in the certificate of incorporation, the di- 
 rectors shall be classified in respect of the time for which 
 they shall severally hold office, by dividing them into three 
 classes, each class consisting of one-third of the whole num- 
 ber of the Board of Directors. The directors of the first 
 class shall be elected for a term of one year; the directors 
 of the second class shall be elected U^y a term of two years; 
 and the directors of the third class shall be elected for a 
 term of three years. At each annual election, the succes- 
 sors to the directors of the class whose term shall expire in 
 that year, shall be elected to hold office for the tei*m of 
 three years, so that the terai of office of one class of direct- 
 ors shall expire in each year. 
 
 The number of directors shall be twenty-four; but the 
 number of directoi-s may be altered from time to time bv 
 the alteration of these by-laws. 
 
 In case of any increase of the number of directoi's, the 
 additional directors shall be elected l)y the directors then in 
 office; one-third of such additional directors for the unex- 
 
468 BUSINESS ORGANIZATION DOCUMENTS 
 
 pired portion of the term of one year; one-third for the un- 
 expired portion of the term of two years ; and one-third for 
 the unexpired portion of the tenn of three years, so that 
 each class of directors shall be increased equally. 
 
 Every director shall be a holder of at least one share 
 of the capital stock of the Company. Each director shall 
 serve for the term for which he shall have been elected, 
 and until his successor shall have been duly chosen. 
 
 At all elections of the directors, the polls shall remain 
 open for at least one hour, unless every registered o^vner of 
 shares has sooner voted in person or by proxy, or in writ- 
 ing has waived the statutory provision. 
 
 Section 2. Vacancies. In case of any vacancy in the 
 directors of any class through death, resignation, disquali- 
 fication or other cause, the remaining directors, by affirma- 
 tive vote of a majority thereof, may elect a successor to hold 
 office for the unexpired portion of the term of the director 
 w^hose place shall be vacant, and until the election of his 
 successor. 
 
 Such vacancy shall be filled upon and after nominations 
 therefor shall have been made by the Finance Committee. 
 
 Section 3. Place of Meeting, etc. The directors may 
 hold their meetings, and may have an office and keep the 
 books of the Company (except as otherwise may be provid- 
 ed for by law) in such place or places in the State of New 
 Jersey or outside of the State of New Jersey, as the Board 
 from time to time may determine. 
 
 Section 4. Regular Meetings. Regular meetings of 
 the Board of Directors shall be held monthly on the last 
 Tuesday of each month, if not a legal holiday, and if a legal 
 holiday, then on the next succeeding Tuesday not a legal 
 holiday. No notice shall be required for any such regular 
 monthly meeting of the Board. 
 
 Section 5. Special Meetings. Special meetings of the 
 Board of Directors shall be held whenever called by di- 
 rection of the chairman of the Board, or the chairman of the 
 
BY-LAWS OF THE STEEL CORPORATION 469 
 
 Finance Committee, or tlie president, or of onc-tliird of tlic 
 directors for the time being in office. 
 
 The secretary shall give notice of each special meeting 
 by mailing the same at least two days l)ofore the nKH'ting, 
 or by telegraphing the same at least one day before tiic 
 meeting, to each director; but such notice may be waived by 
 any director. Unless otherwise indicated in the notice 
 thereof, any and all business may be transacted at a si)e- 
 eial meeting. At any meeting at which every director shall 
 be present, even though without any notice, any business 
 may be transacted. 
 
 Section 6. Quorum. Ten Directors shall constitute a 
 quorum for the transaction of business; but if at any meet- 
 ing of the Board there ])e less than a quorum i)resent, a ma- 
 jority of those present may adjourn the meeting from time 
 to time. 
 
 The affinnative vote of at least one-third of all the di- 
 rectoi-s for the time being in office shall be necessary for the 
 passage of any resolution. 
 
 Section 7. Order of Business. At meetings of the 
 Board of Directors business shall be transacted in such 
 order as, from time to time, the Board may detennino by 
 resolution. 
 
 At all meetings of the Board of Directors, the chair- 
 man of the Board, or in his absence the chainnan of the 
 Finance Committoe, or, in the absence of both of these of- 
 ficers, the President shall preside. 
 
 Section 8. Contracts. Inasmuch as the diiT.tois of 
 this Company arc men (»[" larLrc .-iiicl diversified business 
 interests, and are likely to ])e coiniected with other corpora- 
 tions with which from time to time this Conqiany must 
 have business dealings, no contract or other transaction be- 
 tween this Company and any other corporation shall be af- 
 fected by the fact that directors of this Conq)any arc inter- 
 ested in, or are directors or officei*s of, such other corpora- 
 tion, if, at the meeting of the Board, or of the committee of 
 
470 BUSINESS ORGANIZATION DOCUMENTS 
 
 this Company, making, authorizing or confirming such con- 
 tract or transaction, there shall be present a quorum of di- 
 rectors not so interested ; and any director individually may 
 be a party to, or may be interested in, any contract or trans- 
 action of this Company, provided that such contract or 
 transaction shall be approved or be ratified by the affirma- 
 tive vote of at least ten directors not so interested. 
 
 The Board of Directors in its discretion may submit any 
 contract or act for approval or ratification at any annual 
 meeting of the stockholders, or at any meeting of the stock- 
 holders called for the purpose of considering any such act 
 or contract; and any contract or act that shall be approved 
 or be ratified by the vote of the holders of a majority of the 
 capital stock of the Company which is represented in person 
 or by proxy at such meeting (provided that a lawful quorum 
 of stockholders be there represented in person or by proxy) 
 shall be as valid and as binding upon the corporation and 
 upon all the stockholders as though it had been approved 
 or ratified by every stockholder of the corporation. 
 
 Section 9. Compensation of Directors, For his at- 
 tendance at any meeting of the Board of Directoi-s, or of any 
 committee, every director shall receive an allowance of 
 twenty dollars for attendance at each meeting. 
 
 Section 10. Election of Officers and Committees, At 
 the first regular meeting of the Board of Directors in each 
 year (at which a quorum shall be present) held next after 
 the annual meeting, the Board of Directors shall proceed to 
 the election of the executive officers of the Company, and of 
 the Finance Committee to be elected by the Board of Di- 
 rectors under the provisions of Article III and Article IV 
 of the By-Laws. 
 
 Article III. — Finance Committee. 
 
 Section 1. The Board of Directors shall elect from the 
 directors a Finance Committee, and shall designate for such 
 committee a chairman, who shall continue to be chairman 
 
BY-LAWS OF THE STEEL CORPORATION 471 
 
 of the committee during the pleasure of the Board of Di- 
 rectoi-s. 
 
 The Board of Directors sliall fill vaoaneies in the Fin- 
 ance Connnittee by election from the directors; and at all 
 times it shall be the duty of t lie Board of Directors to keep 
 the membership of such committee full, with due regard to 
 the qualifications for such membership indicated in this 
 Article of the By-Laws. 
 
 All action by the Finance Committee shall be reported 
 to the Board of Directors at its meeting next succeeding 
 such action, and shall be subject to revision or alteration by 
 the Board of Directors; provided, that no rights or acts of 
 third parties shall be affected by any such revision or alter- 
 ation. 
 
 The Finance Committee shall fix its owm ndes of pro- 
 ceeding, and shall meet where and as provided by such 
 rules, or by resolution of the Board of Directors, but in 
 every case the presence of at least four members shall be 
 necessary to constitute a quorum. 
 
 In every case the affimiative vote of a majority of all of 
 the members of the committee present at the meeting, shall 
 be necessary to its ado])tion of any resolution. 
 
 Section 2. Tlie Finance Committee shall consist of 
 seven members, besides the chairman of the Board and 
 the president, each of whom, by virtue of his ofTice, shall be 
 a member of the Finance Committee. So far as practi- 
 cable each of the seven elected members of the Finance 
 Committee shall be a person of experience in mattei'S of fin- 
 ance. Unless otherwise ordered by the Board of Direct- 
 ors, each elected mcm])er of the Finance Committee shall 
 continue to be a member thereof until the expiration of his 
 term of office as a director. 
 
 The Finance Committee shall have special charge and 
 control of all financial affairs of the Company. The presi- 
 dent, the vice-presidents, the general counsel, the treasurer, 
 the comptroller and the secretary, and their respective of- 
 
472 BUSINESS ORGANIZATION DOCUMENTS 
 
 fices shall be under the direct control and supervision of 
 the Finance Committee, and of its chairman when the Com- 
 mittee is not in session. 
 
 During the intervals between the meetings of the Board 
 of Directors, the Finance Committee shall possess, and may- 
 exercise, all the powers of the Board of Directors, in the 
 management of all the affairs of the Company, including 
 its purchases of property, and the execution of legal in- 
 struments with or without the corporate seal in such man- 
 ner as said committee shall deem to be best for the interests 
 of the Company, in all cases in which specific directions 
 shall not have been given by the Board of Directors. 
 
 During the intervals between the meetings of the Fi- 
 nance Committee, and subject to its review, the chairman of 
 the Board and the chairman of the Finance Committee to- 
 gether, shall possess, and may exercise any of the powers 
 of the committee, except as from time to time shall be other- 
 wise provided by resolution of the Board of Directors. 
 
 Except as otherwise provided by the By-Laws, or by 
 resolution of the Board of Directors, all salaries and com- 
 pensations paid or payable by the Company shall be fixed 
 by the Finance Committee. 
 
 No director not an executive officer shall become a sal- 
 aried employe of the Company except by special vote of the 
 Finance Committee. 
 
 Article IV.— Officers. 
 
 Section 1. Officers, The executive officers of the Com- 
 pany shall be a chairman of the Board of Directors, a chair- 
 man of the Finance Committee, a president, a vice-presi- 
 dent, or more than one vice-president, a general counsel, a 
 treasurer, a secretary and a comptroller, all of whom shall 
 be elected by the Board of Directors. 
 
 The Board of Directors may appoint such other officers 
 as the^ shall deem necessary, who shall have such authority 
 
BY-LAWS OF THE STEEL CORPORATION 473 
 
 and shall perform such duties as from time to time may be 
 prescribed by the Board of Directors. 
 
 One person may hold more tlian one office. 
 
 In its discretion, the Board of Directors by a vote of a 
 majority thereof may leave imfUlcd for any such period as 
 it may fix by resolution, any office except those of president, 
 treasurer, secretary and comptroller. 
 
 All officers and a,e:ents shall be subject to removal at 
 any time by the affimiative vote of a majority of the whole 
 Board of Directors. All officers, agents and employes, 
 other than officers appointed by the Board of Directoi*s, 
 shall hold office at the discretion o'f.the committee or of the 
 officer appointini^ them. 
 
 Each of the salaried officers of the corporation shall de- 
 vote his entire time, skill and energy to the business of the 
 corporation, unless the contrary is expressly consented to 
 by the Board of Directors or the Finance Committee. No 
 vacation shall be taken by any of such officers except by 
 consent of the Board of Directoi-s or the Finance Com- 
 mittee. 
 
 The Finance Committee shall have power to remove all 
 officers, agents and employes of the Company, except of- 
 ficers elected or appointed by the Board of Directors. 
 
 Section 2. Powers and Duties of the C/mirman of the 
 Board. The chainnan of the Board of Directors shall be 
 the chief executive officer of the corporatir»n and, subject to 
 the Board of Directors and Finance Committee, shall be in 
 general charge of the affairs of the corporation. He shall 
 preside at all meetings of the stockholders and of the Board 
 of Directors; and by virtue of his office shall be a member of 
 the Finance Committee. 
 
 Section ?>. Poirrrs and Duties of the President. In 
 the absence of the Chainnan of the B^nird and the Chairman 
 of the Finance Committee, the president shall preside at 
 all meetings of the stockholders and of the Board of Di- 
 rectors. By virtue of his office he shall be a member of the 
 
474 BUSINESS ORGANIZATION DOCUMENTS 
 
 Finance Committee. Subject to the Board of Directors 
 and the Finance Committee, he shall have general charge of 
 the business of the corporation relating to manufacturing, 
 mining and transportation and general operation. He shall 
 keep the Board of Directors and the Finance Committee 
 and the Chairman of the Board and the Chairman of the 
 Finance Coromittee fully informed, and shall freely consult 
 them concerning the business of the corporation in his 
 charge. He may sign and execute all authorized bonds, 
 contracts, checks or other obligations in the name of the 
 corporation, and with the treasurer or an assistant treasurer 
 may sign all certificates of the shares in the capital stock 
 of the corporation. He shall do and perform such other 
 duties as from time to time may be assigned to him by the 
 Board of Directors. 
 
 Section 4. Vice-Presidents. The Board of Directors 
 may appoint a vice-president or more than one vice-presi- 
 dent. Each vice-president shall have such powers, and 
 shall perform such duties, as may be assigned to him by the 
 Board of Directors or the Finance Committee. 
 
 Section 5. The General Counsel. The general coun- 
 sel shall be the chief consulting officer of the Company in all 
 legal matters, and subject to the Board of Directors and the 
 Finance Committee, shall have general control of all mat- 
 ters of legal import concerning the Company. 
 
 Section 6. Potvers and Duties of Treasurer. The 
 treasurer shall have custody of all the funds and securities 
 of the Company which may have come into his hands ; when 
 necessary or proper he shall endorse on behalf of the Com- 
 pany, for collection, checks, notes and other obligations, 
 and shall deposit the same to the credit of the Company in 
 such bank or banks or depositary as the Board of Directors 
 or the Finance Committee may designate; he shall sign all 
 receipts and vouchers for payments made to the Company; 
 jointly with such other officer as may be designated by the 
 Finance Committee, he shall sign all checks made b^ the 
 
BY-LAWS OF THE STEEL CORPORATION 475 
 
 Compam% and shall pay out and dispose of the samo under 
 the direction of" tlic iM.ni-d or of flir P'inanee Conniiittco; lie 
 shall sii;-n witli the president, or such other person or |)cr- 
 sons as may he designated for the i)ui-pose hy the I>oard of 
 Directors or the Finance Connnittee, all hills rf exchan^'e 
 and promissory notes of the Company; he may si^ni, with 
 the president or a vice-president, all certificates of shares 
 in the capital stock; whenever rerpiired hy the Board of Di- 
 rectors or hy the Finance Connnittee, he shall render a 
 statement of his cash account; he shall enter rei^ndarly, in 
 books of the Company to he kept hy liim for the ])ui'])ose, 
 full and accurate account of all moneys received and paid 
 by him on account of the Company; he shall, at all reason- 
 able times, exhibit his books and accounts to any director 
 of the Company upon application at the office of the Com- 
 pany during business hours; and he shall perform all acts 
 incident to the position of treasurer, sul)ject to the control 
 of the Board of Directors or of the Finance Connnittee. 
 
 He shall give a bond for the faithful discharge of his 
 duties in such sum as the Board of Directors or the Finance 
 Committee may require. 
 
 Section 7. Assisfn))f Treasurers. The Board of Di- 
 rectors or the Finance Committee may apjioint an assistant 
 treasurer or more than one assistant treasurer, i^ach as- 
 sistant treasurer shall have such powers and shall j)erform 
 such duties as may be assigned to him by tin* Board of Di- 
 rectors, or by the Finance Connnittee. 
 
 Section 8. Powers and Duties of Seerctari/. The sec- 
 retary shall keep the miinites of all meetings of the Board of 
 Directors, and the minutes of all meetings of the stock- 
 holdei*s, and also (unless othei'wise dii-ected by the Finance 
 Connnittee) the minutes of all conunittees, in books ])ro- 
 vided for tliat pnrjiose; he shall attend tn the giving and 
 serving of all notices of the CN>mpany; he may sign with the 
 presid(^nt in the name of the Company, all contracts author- 
 ized by the Board uf Directors or by the Finance Commit- 
 
476 BUSINESS ORGANIZATION DOCUMENTS 
 
 tee, and, when so ordered by the Board of Directors or the 
 Finance Committee, he shall affix the seal of the Company 
 thereto; he shall have charge of the certificate books, trans- 
 fer books and stock ledgers, and such other books and 
 papers as the Board of Directors or the Finance Committee 
 may direct, all of which shall, at all reasonable times, be 
 open to the examination of any director, upon application 
 at the office of the Company during business hours; and he 
 shall in general perform all the duties incident to the office 
 of secretary, subject to the control of the Board of Direct- 
 ors and of the Finance Committee. The offices of secre- 
 tary and of treasurer may be held by one and the same 
 person. 
 
 Section 9. Assistant Secretaries. The Board of Di- 
 rectors or the Finance Committee may appoint one assist- 
 ant secretary or more than one assistant secretary. Each 
 assistant secretary shall have such powers and shall per- 
 form such duties as may be assigned to him by the Board 
 of Directors or by the Finance Committee. 
 
 Section 10. Comptroller, The Comptroller shall be 
 the principal officer in charge of the accounts of the Com- 
 pany, and shall perfonn such duties as from time to time 
 may be assigned to him by the Board of Directors or the 
 Finance Committee. 
 
 Section 11. Voting upon Stocks. Unless otherwise 
 ordered by the Board of Directors or by the Finance Com- 
 mittee, the chairman of the Board or the chairman of the 
 Finance Committee shall have full power and authority in 
 behalf of the Company to attend and to act and to vote at 
 any meetings of stockholders of any corporation in which 
 the Company may hold stock, and at any such meeting shall 
 possess and may exercise any and all the rights and powers 
 incident to the ownership of such stock, and which, as the 
 owner thereof, the Company might have possessed and ex- 
 ercised if present. The Board of Directors or the Finance 
 
BY-LAWS OF THE STEEL CORPORATION 477 
 
 Committee, by resolution, froni time to time, may cunier 
 like 2)owers upon any other person or persons. 
 
 Article V.— Capital Stock— Seal. 
 
 Section 1. Ccrlijlcalcs of Slnircs. The certilieates for 
 shares of the capital stock of the Company shall ])c in such 
 fonn, not inconsistent wilh ilic eei'titicate of incorporation, 
 as shall be prepared or be approved by the Board of Di- 
 rectors. The certiticates shall be sic^ned by the president 
 or a vice-president, and also by the treasurer or an as- 
 sistant treasurer. 
 
 All certificates shall be consecutively numbered. The 
 name of the person owning: the shares represented thereby, 
 Avith the number of such shares and the date of issue, shall 
 be entered on the Company's books. 
 
 No certificate shall l)e valid unless it is sipnif'd by the 
 president or a vice-president, and by the treasurer or an 
 assistant treasurer. 
 
 All certificates surrendered to the Company shall be ean- 
 celed, and no new certificate sliall be issued until the foi-m- 
 er eertifieate for the same number of shares of the same 
 class shall have been surrendered and caneeled. 
 
 Section 2. Transfer of Sluircs. Shares in the capital 
 stock of the Company shall be transferred only on the 
 books of the Company by the holder thereof in person, or 
 by his attorney, upon surrender and cancellation of certi- 
 ficates for a like number of shares. 
 
 Section 3. Bc(juJations. The Board of Directoi-s, and 
 the Finance Committee also, shall have power and author- 
 ity to make all such rules and regulations as respectively 
 they may deem expedient, eoneernini:^ the issue, transfer 
 and ree^istration of certificates for shares of the capital 
 stock of the Company. 
 
 The Board of Directors or the Finance Committee may 
 appoint a transfer agent and a registrar of transfers, and 
 
478 BUSINESS ORGANIZATION DOCUMENTS 
 
 may require all stock certificates to bear the signature of 
 such transfer agent and of such registrar of transfers. 
 
 Section 4. Closing of Transfer Boohs. The stock 
 transfer books shall be closed for the meetings of the stock- 
 holders, and for the payment of dividends, during such peri- 
 ods as from time to time may be fixed by the Board of Di- 
 rectors or by the Finance Committee, and during such pe- 
 riods no stock shall be transferable. 
 
 Section 5. Dividends. The Board of Directors may 
 declare dividends from the surplus or from the net profits 
 of the Company. 
 
 The dates for the declaration of di\adends upon the 
 preferred stock and upon the common stock of the Com- 
 pany shall be the days by these By-Laws fixed for the regu- 
 lar monthly meetings of the Board of Directors in the 
 months of April, July, October and January in each year, 
 on which days, the Board of Directors in its discretion shall 
 declare what, if any, dividends shall be declared upon the 
 preferred stock and the common stock, or either of such 
 stocks. 
 
 The dividends upon the preferred stock, if declared, sev- 
 erally and respectively, shall be payable quarterly upon the 
 day preceding the last day of ^lay, of August, of November, 
 and of February in each year. 
 
 The dividends upon the common stock, if declared, sev- 
 erally and respectively, shall be payable quarterly on the 
 da}^ preceding the last daj^ of June, of September, of De- 
 cember and of March in each year. 
 
 If the date herein appointed for the payment of any di- 
 vidend shall in any year fall upon a legal holiday, then the 
 dividend payable on such date shall be paid on the next pre- 
 ceding day not a legal holiday. 
 
 Section 6. Working Capital. The directors shall not 
 be required in January in each year, after reserving over 
 and above its capital stock paid in, as a working capital for 
 said corporation, such sum, if any, as shall have been fixed 
 
BY-LAWS OF THE STEEL CORPORATION 479 
 
 by the stockholders, to dechiiv a dividmd anion*; its stock- 
 holders of the whole of its accumulated profits exceeding 
 the amouut so reserved, and pay the same to such stock- 
 holders on demand; but the Board of Directors may fix a 
 smu which may be set aside or reserved, over and above 
 the Company's capital paid in, as a working; capital for the 
 Company, and from time to time they may increase, di- 
 minish and vary the same in their absolute jud^nent and 
 discretion. 
 
 Section 7. Corporate Seal. The Board of Directors 
 shall provide a suitable seal, containing the name of the 
 Company, which seal shall be in charge of the secretary. 
 If and when so directed 1)y the Board of Directors or by the 
 Finance Committee, a duplicate of the seal may be kept and 
 be used by the treasurer or by any assistant secretary or 
 assistant treasurer. 
 
 Article VI. — Amendments. 
 
 Section 1. The Board of Directors shall have power to 
 make, amend and repeal the By-Laws of the Company, by 
 vote of a majority of all of the directors, at any regular or 
 special meeting of the Board, })rovidc(i that notice of in- 
 tention to make, amend or repeal the By-Laws in whole or 
 in part shall have been given at the next preceding meeting; 
 or without any such notice, by a vote of two-thii-ds of all the 
 directors. 
 
VI. MISCELLANEOUS FORMS. ^ 
 
 (A)— PEOXY— STOCKHOLDERS' MEETING 
 
 Know All Men by These Presents, 
 
 That I, the undersigned, being the owner of 
 
 shares of the capital stock of the 
 
 Company, do hereby constitute and appoint 
 
 my true and lawful attorney, in my name, place and stead, 
 to vote upon the stock owned by me or standing in my 
 name, as my proxy, at the annual (or special) meeting of 
 the stockholders of the said company, to be held at the 
 
 Company 's principal office, street, 
 
 N. J., on the day of 19 . . , 
 
 and on such other day as the meeting may be thereafter 
 held by adjournment or otherwise, according to the num- 
 ber of votes I am now or may then be entitled to cast, here- 
 by granting the said attorney full power and authority to 
 act for me and in my name at the said meeting or meetings, 
 in voting for directors of the said company or otherwise, 
 and in the transaction of such other business as may prop- 
 erly come before the meeting, as fully as I could do if per- 
 sonally present, with full power of substitution and revoca- 
 tion, hereby ratifying and confirming all that my said at- 
 torney or substitute may do in my place, name and stead. 
 
 In AYitness Whereof, I have hereunto set my hand and 
 seal, this .... day of 19 . . . 
 
 Witness: [L. S.] 
 
 (B)— CERTIFICATE OF COMMON STOCK. 
 
 Incorporate and Registered Under the Laws of the 
 State of New Jersey. 
 
 *The Proxy, Stock Certificates, Registered Bond, and Certificate of Bis- 
 solution are from Dill on New Jersey Corporations, 4th Ed.; The Reorganiza- 
 tion Certificate is from Frank's Science of Organization and Business ®evel- 
 opment. 
 
 480 
 
STOCK CERTIFICATES 481 
 
 Capital Stock $ 
 
 (Number) (Shares) 
 
 Tlie roinpanv 
 
 This iy to CV'rtitiy, that is the 
 
 registered holder of shares of the capital stock 
 
 of this Company, transferable only on t lie books of the ( 'om- 
 ]\any by the holder thereof, in person or ])y duly authorized 
 attorney, upon surrender of this cei-tificate properly en- 
 dowed . 
 
 Witness the seal of the Company and the signatures of 
 
 its president and treasurer this dav of 
 
 19... 
 
 (Seal) President. 
 
 Treasurer. 
 Shares, $100 each. 
 
 (C)— CERTIFICATE OF PREFERRED STOCK. 
 
 (Number) (Shares) 
 
 Incorporated and Registered Under the Laws of the 
 State of New Jersey. 
 
 Capital Stock . . . .* $ 
 
 Preferred Stock, $ Conunon Stock, $ 
 
 The Company 
 
 This is to certify, that is the 
 
 registered holder of shares of tlie jireferred capital 
 
 stock of this company, transferal)h^ only on the books of 
 this Company, in person or l)y duly authorized attorney, 
 upon surrender of this certificate properly endoi-sed. 
 
 This stock is pai-f of an issue amountini,^ in all ti» "? 
 
 par value, authorized by the certiticate of incorporation of 
 the Company, tiled in the office of the Secretary of State of 
 
 the State of New Jersey, on the day of 
 
 19... 
 
 This ceHificate entitles the holder thereof to reccMve, 
 and the Company is bound to ])ay, a t'wod y«>arly dividend 
 of per centum per annum, payable half-yearly, be- 
 
 B— II— II 
 
482 BUSINESS ORGANIZATION DOCUMENTS 
 
 fore any dividends shall be set apart or paid on the com- 
 mon stock, and the dividends on the preferred stock are 
 cumulative. The preferred stock is subject to redemption 
 at par on the day of , 19 . . .* 
 
 The holders of the preferred stock may choose exclu- 
 sively directors, and the holders of the general 
 
 stock may choose exclusively directors of the 
 
 Company. 
 
 Witness the seal of the Company and the signatures of 
 
 its president and treasurer this day of , 
 
 19... 
 
 (Seal)] President. 
 
 Treasurer. 
 Shares, $100 each. 
 
 ;(DJ— REGISTERED BOND WITHOUT COUPONS. 
 
 UNITED STATES OF AMERICA 
 
 Company 
 
 Registered Fifty-Year Four Per Cent Gold Bond. 
 
 $ No 
 
 Company, a corporation 
 
 created and existing under the laws of the State of New 
 Jersey, and hereinafter termed "the Company," for value 
 
 received promises to pay to or registered assigns 
 
 on the first day of A. D., , at its office or agency 
 
 in the city of New York, the sum of dollars in 
 
 gold coin of the United States of the present standard of 
 weight and fineness, and to pay interest thereon from the 
 
 first day of or the first day of , 
 
 as the case may be, next preceding the date hereof, at the 
 rate of four per cent per annum, such interest to be pay- 
 able to the registered holder hereof at said office or agency 
 in like gold coin semi-annually on the first days of 
 
 *Must be at least three years from the date of issue. (N. J. Corpora- 
 tion Laws, Revision of 1896, Sec. 18.) 
 
REGISTERED BONDS 483 
 
 and in cacli year. A LI paymonts upon this 
 
 bond, both of principal and intiTcst, shall he made without 
 
 deduction of any tax or taxes which the 
 
 Conij)any, its successors or assijj^ns, may be required to 
 pay, deduct or retain therefr<»ni under any jjrcsent or fu- 
 ture law of the United States or of any state, county or 
 municipality therein. 
 
 This bond is one of a duly authorized issue of coupon 
 
 and registered bonds of the Com])any, 
 
 the aggregate amoimt whereof is limited so that there shall 
 never at any one time be outstanding bonds of said issue for 
 
 an aggregate principal sum exceeding $ All of 
 
 which bonds have been issued, or are to be issued, under 
 and in pursuance of, and are to be secured ratably by, and 
 
 are subject to, an indenture dated , A. D., 
 
 . . . ., duly executed by the Company 
 
 to the Trust Company, as trustee, under 
 
 w^hich indenture certain shares of stock have been and are 
 to be deposited wuth said trustee; and a charge is imposed 
 upon present and future net income, earnings and profits 
 
 of the Company; and hereby refcrenc(» 
 
 is made to said indenture with the same effect as if herein 
 fully set forth. 
 
 No recourse shall be had for the payment of the princi- 
 pal or interest of this bond against any stockholder, ofticer 
 
 or director of the Company, either 
 
 directly or through the Company, by virtue 
 
 of any statute or by enforcement of any assessment or 
 othenvise, any and all liability of stockholders, directoi-s 
 
 and officers of the Company being 
 
 hereby released. 
 
 This bond is transferable only in the manner prescribed 
 
 in said indenture on the books of the 
 
 Company, at its office or agency in the city of New York, 
 upon surrender and cancellation of this bond; and there- 
 upon a new registered bond will be issued to the transferee 
 
484 BUSINESS ORGANIZATION DOCUMENTS 
 
 in exchange therefor on payment of the charge provided in 
 said indenture. 
 
 Upon surrender and cancellation of registered bonds 
 for the principal amount of $1,000 or any multiple thereof, 
 coupon bonds of a like amount of principal with all un- 
 matured coupons attached will be issued as provided in 
 said indenture. 
 
 This bond shall not become or be valid until authen- 
 ticated by the certificate endorsed hereon, duly signed by 
 the trustee under said indenture. 
 
 In Witness Whereof, the Company 
 
 has caused these presents to be signed by a vice-president, 
 and its corporate seal to be hereunto affixed and to be at- 
 tested by its secretary or assistant secretary, this 
 
 day of , A. D., 
 
 Attest: By Company 
 
 Secretary. Vice-president. 
 
 (E)— REORGANIZATION CERTIFICATE. 
 
 This is to Certify That Richard Roe of Chicago, Illinois 
 (hereinafter designated as the transferer), has transferred 
 and delivered to William Smith (hereinafter designated as 
 the transferee). Certificate No. 23 for 1,000 shares of the 
 capital stock of the Doe Electrical Mfg. Co., for the pur- 
 poses and upon the conditions following, viz.: 
 
 First. That the transfer above named is made to en- 
 able the said transferee to effect a reorganization of the 
 said Company, by reincorporating the same under the laws 
 of the State of Illinois; said Illinois corporation to be 
 known by the same or similar name as the present organi- 
 zation, and to have a capital stock of $125,000; that the new 
 corporation, when formed, shall have $10,000 in cash paid 
 in its treasury, after all obligations of the present Company 
 are discharged; and also to have in its treasury $15,000 — 
 face value — of its capital stock for sale, at par; that said 
 
CERTIFICATE OF DISSOLUTION 485 
 
 corporation, when reorp^nnizod l)y said transferor, sliall pos- 
 sess and own by transfer fn^m the Hoard of Directors of 
 the present corporation all the assets thereof. 
 
 Second. That the said trarLsferee a.i,'rees to deliver, 
 and the said transferer agrees to receive, in lieu of said 
 stock certificate, a new certificate in the said reorganized 
 Company, for 50 shares of its capital stock at the par vahi(^ 
 of $10.00 per share, fully paid and non-assessahle. 
 
 Third. It is further understood that this agreement is 
 made, and the said reorganization is contemplated, for the 
 purpose of discharging the obligations of the said The Doe 
 Electrical iMfg. Co., and to preserve its assets for the benefit 
 of all its stockholders, equally, and that to accomplish said 
 objects the said transferee is hereby vested with all the 
 powere and rights of o^^^lership, in and to the said stock 
 so transferred, and with full power to consummate said 
 reorganization in accordance herewith. 
 
 Fourth. It is further agreed that the said transferee 
 shall perfect said reorganization, as soon as may be after 
 all the outstanding stock in the present corporation is 
 transferred and surrendered under the tenns of this cer- 
 tificate; that upon his failure or inability so fo do, within 
 a reasonable time, he shall redeliver and transfer said cer- 
 tificate to the said transferer. 
 
 In Testimony Whereof, the said parties hereto, have 
 hereunto set theii- hands, and afTixed their seals, at Chicago, 
 Illinois, this 4th day of Mav, A. D., 1907. 
 
 HTCTTARD KOE (Real) 
 WILLIA.M JSMITH (Seal) 
 
486 BUSINESS ORGANIZATION DOCUMENTS 
 
 (F)— CEETIFICATE OF DISSOLUTION ISSUED BY 
 SECEETARY OF STATE. 
 
 State of New Jersey. 
 
 Department of State. 
 Certificate of Dissolution. 
 To All to Whom These Presents May Come, Greeting: 
 
 Whereas, it appears to my satisfaction by duly authen- 
 ticated record of the proceedings for the voluntary dissolu- 
 tion thereof by the unanimous consent of all the stock- 
 holders, deposited in my office, that the 
 
 Company, a corporation of this State, whose principal office 
 
 is situated at No street, in the city of , 
 
 County of • , State of New Jersey ( 
 
 being the agent therein and in charge thereof upon whom 
 process may be served), has complied with the require- 
 ments of *'An Act Concerning Corporations (Revision of 
 1896)," preliminary to the issuing of this 
 
 Certificate of Dissolution. 
 
 Now, Therefore, I, Secretary of State of the 
 
 State of New Jersey, do hereby certify that the said corpor- 
 ation did on the day of , 19. ., file in 
 
 my office a duly executed and attested consent in writing 
 to the dissolution of said corporation executed by all the 
 stockholders thereof, which said consent, and the^ record 
 of the proceedings aforesaid are now on file in my said office 
 as provided by law. 
 
 In Testimony Whereof, I have hereto set my hand and 
 
 affixed my official seal at Trenton, this .... day of 
 
 A. D., 19... 
 
 (L. S.i Secretary of State. 
 
QUESTTOXS IN 
 
 BUSINESS ADMINISTRATION 
 
 BUSINESS ORGANIZATION AND MANAGEMENT. 
 
 Fundamental Principles. 
 
 1. "Wliat would l)c the nature of a complete in(li\idual 
 economic life? Page 3. 
 
 2. Illustrate social economy. Page 4. 
 
 3. Define organization. "What is the object of the busi- 
 ness organization? Pages 5, 6. 
 
 4. AMiat is the relationship between business manage- 
 ment and business organization ? Pages 6, 7. 
 
 5. What are the factors of wealth production? Pago 8. 
 
 6. Distinguish between a partial business unit and a 
 complete business unit. Pages 12, 13. 
 
 7. What are the characteristics of the ct)mmunistic so- 
 ciety? Page 14. 
 
 8. How do socialists differ from communists? Page 15. 
 
 9. IIow is the co-operative society managed? Page 16. 
 
 10. What industry requires the simplest form of business 
 organization? The most complex fonn? Why? 
 
 Pages 19-21. 
 
 11. In what respects do governments protect business or- 
 ganizations? Page 22. 
 
 12. What is the attitude of governments toward the com- 
 l)inati(.n? Pagos 22, 23. 
 
 13. IIow does co-operation at tlie prt-scnt time differ from 
 that of early times? Page 26. 
 
 14. What part does accountancy play in the modem busi- 
 ness organization? Page 27. 
 
 487 
 
488 BUSINESS ORGANIZATION 
 
 15. What factors have prevented the development of the 
 business organization? Page 28. 
 
 Organization of Business Enterprises. 
 
 1. What business enterprises cannot be conducted by an 
 individual? Page 29. 
 
 2. How is the law of survival of the fittest applied to in- 
 dividual proprietorships? Page 31. 
 
 3. To what classes of industrial enterprises is the indi- 
 vidual proprietorship adapted? Page 32. 
 
 4. Why cannot the business of a partnership be con- 
 ducted through a board of directors? Page 33. 
 
 5. Describe the development of the general partner- 
 ship. Page 34. 
 
 6. What subjects should be covered by the articles of co- 
 partnership of any business undertaking? Page 35. 
 
 7. Explain the origin of the partnership. Page 39. 
 
 8. To what forms of business enterprise is the partner- 
 ship adapted? Why? Page 40. 
 
 9. What was the cause of the slow development of the 
 corporation? Page 41. 
 
 10. What is the advantage in the principle of limited 
 liability? Pages 43, 44. 
 
 11. Compare the management of the corporation with 
 that of the individual proprietorship; with that oi 
 the partnership. Pages 47, 48. 
 
 12. What are the characteristics of a municipal corpor- 
 ation? A social corporation? A business corpor- 
 ation? Pages 49, 50. 
 
 13. How are business corporations subdivided? Why is 
 such subdivision important? Page 50. 
 
 The Formation of the Corporation. 
 
 1. What methods does a promoter use to secure cap- 
 ital? Page 57. 
 
 2. What points must a promoter consider in choosing the 
 
QUIZ QUESTIONS 489 
 
 state in which to take out a charter of incorpor- 
 ation? Pages 57-60. 
 
 3. What are the leading charter-granting states? 
 
 Page 60. 
 
 4. What is the method of forming a corporation in Ill- 
 inois? In New Jersey? Pages 60-62. 
 
 5. What is meant by watered stock? Page 62. 
 
 6. ^Miat connection with the corporation does a bond- 
 holder have? Page 63. 
 
 7. ^\liat is cumulative preferred stock ? Page 64. 
 
 8. "What is the relation between the preferred stock and 
 the bonds of a corporation? Page 66. 
 
 9. What must be the value of the common stock in any 
 corporation? Pages 66, 67. 
 
 10. How can the common stock issue be inflated? What 
 are the results of such inflation? Pages 67-70. 
 
 11. What points must every charter of incorporation in- 
 clude? Page 71. 
 
 12. Wliy was the decision in the Dartmouth College case 
 so important? Page 74. 
 
 13. AVhat is the purpose of the by-laws of a corporation? 
 
 Pages 75, 76. 
 
 14. What are the duties of the chairman of the board of 
 directors? Page 79. 
 
 15. What evils are connected with the declaration of divi- 
 dends in a corporation? What precautions are taken 
 to guard against these evils? Page 82. 
 
 16. How does the manner in which the by-laws of a cor- 
 poration are amended in Illinois differ from that in 
 New Jersey ? Page 84. 
 
 Internal Organization of the Corporation. 
 
 1. Wliat two fundamental rights have all bondholders? 
 
 Page 85. 
 
 2. Wliat is the function of the receiver? Pago 86. 
 
 3. WTio has the direct control of a corporation! Page 87. 
 
490 BUSINESS ORGANIZATION 
 
 4. State two instances in which the stockholders may 
 supervise the management of the corporation. 
 
 Page 88. 
 
 5. What gave rise to the specific proxy? Why is a spe- 
 cific proxy impracticable? Page 91. 
 
 6. Illustrate the principle of cumulative voting. Page 92. 
 
 7. How does the stockholder secure a knowledge of the 
 financial condition of a corporation? Page 93. 
 
 8. What does the expression "cutting a melon" mean on 
 Wall Street? Page 95. 
 
 9. Wlio has the right to declare dividends in a corpor- 
 ation? Page 98. 
 
 10. Wlien is a stockholder individually liable for debts 
 due the creditors of a corporation? Page 102. 
 
 11. AMiat right have creditors to interfere in the manage- 
 ment of a corporation? Page 104. 
 
 12. What are the duties of the directors of a corporation? 
 
 Page 104. 
 
 13. What consideration should govern directors in fore- 
 going dividends ? Page 107. 
 
 14. How can a director be removed from office ? Page 109. 
 
 Organization for Operation. 
 
 1. What feature is common to the chief executives of the 
 different forms of business enterprise ? Page 117. 
 
 2. How do directors sometimes become the tools of the 
 executive officers of a corporation? Page 120. 
 
 3. Illustrate the two methods used in organizing the op- 
 erations of a company into departments. Page 123. 
 
 4. Wliy should the work of collection be made a branch 
 of the general accounting department? Page 126. 
 
 5. AYhat are the advantages of the departmental account- 
 ing system? Page 127. 
 
 6. How are those in charge of the price-making aided by 
 the central accounting system? Page 130. 
 
QUIZ QUESTIONS 491 
 
 7. What one qualilieatioii inu.st a credit man possess? 
 
 Pa^e 135. 
 
 8. What are the disadvantages of the department system 
 of {)iir('hasing? Page 138. 
 
 7. What advantages does a steel mannfaetnring ('om])any 
 gain by owning its own mines? Page 1 V2. 
 
 10. Give an instance where a testing laboratory is an aid 
 to a mamifacturing company. Page 145. 
 
 11. How is the advertising agent guided in choosing a 
 medium? Page 151. 
 
 12. What character of advertising should be done through 
 an agency? Through the advertising department of 
 the concern? Page 153. 
 
 13. Compare the brokerage and conunission systems of 
 selling goods. Page 15(). 
 
 14. What are the advantages of selling through a com- 
 mission house ? Page 157. 
 
 15. What object has the manufacturer in using the con- 
 tract system of selling to the wholesaler? Page IGO. 
 
 1(). What changes are made in the selling organization 
 when the manufacturer sells to the retailer? Page 160. 
 
 17. How can the district manager test the accurac.v of the 
 salesmen's reports? Page 164. 
 
 18. What knowledge must the rating di\dsion of a traffic 
 department possess? Page 167. 
 
 Inter-Relations of Business Enterprises. 
 
 1. "Wliat is the work of the Chaml)cr of Conuncrce of 
 Champaign, 111.? Page 171. 
 
 2. How does the ^Eerchants' Association of New York 
 City differ from the general association? Page 172. 
 
 3. In what two projects has the Illinois ^fanufacturers' 
 Association been interested? Page 173. 
 
 4. AVhat methods of working does the Illinois ^lanufac- 
 turers' Association employ? Page 175. 
 
492 BUSINESS ORGANIZATION 
 
 5. What facts show that combinations are considered il- 
 legal in the United States ? Page 176, 
 
 6. What is the purpose of a combination? Page 177. 
 
 7. What is the nature of a geographical combination? 
 
 Page 178. 
 
 8. How is a profit-sharing combination managed? 
 
 Page 179. 
 
 9. Why is the trust more advantageous than the com- 
 bination? Page 180. 
 
 10. What part has New Jersey played in the development 
 of the holding corporation? Page 182. 
 
 11. In what respects is the holding corporation like the 
 trust? Page 183. 
 
 12. Distinguish between the contingent lease and the di- 
 rect money rental. Page 184. 
 
 13. How is a merger formed? Page 185. 
 
 Business Efficiency. 
 
 1. Give an example of technical efficiency without busi- 
 ness efficiency. Page 186. 
 
 2. Wherein does the success of a business depend upon 
 technical efficiency? Page 188. 
 
 3. What would be the disadvantages were a milling com- 
 pany to own the source of the raw materials used? 
 
 Page 199. 
 
 4. What has caused the decline in the driving method of 
 getting men to do their work? Page 203. 
 
 5. Name some disadvantages of the piece wage system. 
 
 Page 204. 
 
 6. Upon what principles is the premium plan of wage 
 payment based? Page 209. 
 
 7. How is the price of an article determined by a com- 
 pany which has no competitors ? Pages 217, 218. 
 
 8. How does accounting assist the management? 
 
 Pages 223, 224. 
 
QUIZ QUESTIONS 493 
 
 Railroad Organization. 
 
 1. What is domaiidod of railroad omployos as ono of the 
 greater results of the recent great railroad consolida- 
 tions? Page 225. 
 
 2. What duty is the construction department of a rail- 
 way charged with? Page 229. 
 
 3. What are the weak and vulnerable points of attack 
 of railroad corporations? Page 231. 
 
 4. With what object was the freight claim organization 
 inaugurated? Page 236. 
 
 5. Wliat is the per cent of the entire number of locomo- 
 tives on a railroad that are constantly in the shops for 
 repairs ? Page 242. 
 
 A Railroad Purchasing Department. 
 
 1. "WTiat information should requisitions sent to a rail- 
 road purchasing department contain? Page 248. 
 
 2. AVhat advantages are gained from the adoption of uni- 
 foiTn standards of design for articles used in large 
 quantities? Page 250. 
 
 3. ^Miat important relations exist between the stores and 
 the purchasing departments of a railroad ? 
 
 Pages 251, 252. 
 
 4. Why should the purchasing agent of a railroad keep in 
 close touch with the industrial department? 
 
 Pages 252, 253. 
 
 The Promoter in Modem Business. 
 
 1. From what points of view should a promoter consider 
 a business opportunity in order to satisfy himself that 
 it is worth developing? Page 258. 
 
 2. What are the qualities of a successful promoter? 
 
 Page 260. 
 
 3. Wliat inducements are offered by some states to out- 
 side incorporators? Page 263. 
 
494 BUSINESS ORGANIZATION 
 
 4. Why were most of the trusts floated in an overcapital- 
 ized condition ? Page 266. 
 
 5. What kinds of securities may a corporation issue? 
 
 Page 266. 
 
 6. How are difficulties arising from the distance of a 
 corporation from the state in which it is incorporated 
 overcome? Page 268. 
 
 7. Define the prospectus from the standpoint of the pro- 
 moter; from the standpoint of the prospective investor. 
 
 Pages 269, 270. 
 
 8. Explain the method of selling securities by under- 
 writing. Page 271. 
 
 9. What are the temptations of a promoter? Page 273. 
 
 The Financiering of Trusts. 
 
 1. What expenses must be paid for out of the surplus 
 securities of a corporation? Page 278. 
 
 2. How may preferred stock be made to resemble bonds? 
 Which form is the most advantageous ? Page 281. 
 
 3. Give a method for calculating the good-will of the con- 
 stituent companies of a corporation. Page 282. 
 
 Financial and Industrial Trusts. 
 
 1. What was the character of the early trust ? Page 288. 
 
 2. Name two periods when the president of the Trust 
 Company of the Republic should have given up the 
 financing of the Shipbuilding Company. 
 
 Pages 300, 301. 
 
 3. What were the terms of the agreement under which 
 the Shipbuilding Company was to take over the Beth- 
 lehem Steel Company ? Page 304. 
 
 4. How did the Shipbuilding Company raise money to 
 complete the purchase of the Bethlehem Steel Com- 
 pany? Pages 309-314. 
 
 5. What is the present relation between financial and 
 industrial trusts? Page 319. 
 
QUIZ QUESTIONS 495 
 
 New Jersey's Corporate Policy. 
 
 1. What mistake has New York made in her corporate 
 policy? Pa^os 322-826. 
 
 2. What were the terms of the Slater Pill? Why was it 
 defeated? How did New Jersey treat the same ques- 
 tion? ^ Pages :i27, 328. 
 
 3. What is the importance of a certificate of incorpora- 
 tion in New York ? In New Jersey ? Pages 331, 332. 
 
 4. How do some corporations doing business in New 
 York City dodge the local taxes? Pages 334, 336. 
 
 5. What is a registration company ? Pages 337, 338. 
 
 6. What have been the results of New Jersey's corporate 
 policy on her finances? Banks? Industries? The 
 beneii? Pages 338-341. 
 
 Corporate Reorganizations and Receiverships. 
 
 1. Why is it good policy to consult the rights of the stock- 
 holder in drawing up plans of reorganization? 
 
 Page 351. 
 
 2. What are the features of an income bond ? Page 354. 
 
 3. Why is it better to represent deferred claims by pre- 
 ferred stocks than by income bonds? Page 356. 
 
 4. Why do bondholders object to reorganizing mider a 
 new charter? Pages 359, 360. 
 
 5. What is the manner generally pursued in appointing 
 a friendly receiver? Page 363. 
 
 6. How may the right to issue receivers' certificates be 
 abused? Page 368. 
 
 7. VThy is it becoming necessary for an insolvent manu- 
 facturing company to be put in the hands of a re- 
 ceiver? Page 370. 
 
 Dissolution of a Private Corporation. 
 
 1. When does the consolidation of two companies effect 
 a dissolution ? Page 372. 
 
 2. How may voluntary dissolution be brought about? 
 
 Page 373. 
 
INDEX 
 
 BUSINESS ORGANIZATION AND MANAGEMENT. 
 
 ACCOUNTING— 
 
 as an ai<l in management, 223, 224. 
 
 department of, 12()-i:{7. 
 
 in business organization, 27. 
 
 of investments, 190-201. 
 ADVERTISING— 
 
 division of sales department, 149- 
 154. 
 ASSOCIATION— 
 
 defined. 169. 
 
 Illinois Manufacturers', 17:5-176. 
 
 Merchants', of New York City, 
 171-17:?. 
 
 types of, 17U-17G. 
 AUDITOR— 
 
 of corporation, 81. 
 
 BOND— 
 
 registered, 482-484. 
 BONDHOLDERS— 
 
 rights of. 85-87. 
 BROKERAGE— 
 
 system of selling, 156. 
 BUREAU— 
 
 of estimates, 154, 155. 
 BUSINESS— 
 
 defined. 3. 
 
 efficiency, 180-224. 
 
 industrial conditions aflfccting, 27. 
 28. 
 
 methods of conducting. 14-19. 
 
 nature of, 1. 
 
 organization, 3, G. 
 
 political conditions affecting. 21- 
 24. 
 
 social conditions afTecting. 24-27. 
 
 units. 11-13. 
 BY-LAWS— 
 
 of corporation, 75-84, 459-470. 
 amendments to, 84. 
 
 CAPITAL— 
 
 a factor of production, 10. 
 CAPITALIZATION— 
 
 of corporation, 02-70. 
 CERTIFICATES— 
 
 of dissolution, 480. 
 
 reorganization, 484, 485. 
 
 stock. 480-482. 
 CH A I R.MAN— 
 
 of board, 79. 
 
 B.II-32 
 
 CHAMBER OF COMMERCE— 
 
 of Champaign, 170, 171. 
 CHARTERS— 
 
 corporate, 70-75, 445-458. 
 COLLECTIONS^ 
 
 division of, 135-1.17. 
 COM BI. NATIONS— 
 
 classification of, 177. 
 
 compared with associations, 17C. 
 
 disadvantages of, 179. 
 
 for sharing business, 178. 
 
 for sharing profits, 179. 
 
 geographical, 178. 
 
 legality of, 17G. 
 
 price, 177. 
 
 production, 178. 
 
 purpose of, 177. 
 COM.MERCE— 
 
 organizations needed by, 20. 
 COMMISSION— 
 
 plan of selling, 156-158. 
 COM.MUNISM. 14. 
 COMMUNITY- 
 
 of interests, 184, 185. 
 COM PA NY- 
 joint stock, 34. 
 
 leasing, 1S4. 
 
 sellintr. ir.0-158. 
 CO NTR.ACTS— 383-390. 
 CO-OPERATION— 
 
 success of, 17. 
 CO-PARTNERSHIP— 
 
 articles of, 35-40, 375-382. 
 CORPORATE— 
 
 policv of New Jcrscv. :vJl-344. 
 CORPORATION— 
 
 acts. 391-444. 
 
 advantages of, 51. 
 
 bondholders of, 84-87. 
 
 business, 50. 
 
 by-laws of, 75-84. 
 
 capitalization of, 62-70. 
 
 characteristics of, 41, 43-49. 
 
 defined, 41. 
 
 development of, 41. 
 
 directors of, 77. 
 
 disadvantages of, 52-54. 
 
 dividends of. 82. 83. 
 
 finance of, 83. 84. 
 
 formation of. 56-84. 
 
 growth of, 54-56. 
 
 holding. 181-183. 
 
 49', 
 
498 
 
 INDEX 
 
 CORPORATION— Continued 
 
 internal organization of, 84-115. 
 
 municipal, 49, 
 
 name of, 71. 
 
 object of, 72. 
 
 officers of, 78-82. 
 
 operating organization of. 115-167. 
 
 private, dissolution of, 372-374. 
 
 social, 49. 
 
 stockholders of, 87-103. 
 COUNSEL— 
 
 general, of corporation, 81. 
 CREDITORS— 
 
 liabilities of directors to. 111. 
 
 liabilities of stockholders to, 99- 
 103. 
 
 rights of, 103. 
 CREDITS— 
 
 division of, 132-135. 
 
 DEBT— 
 
 floating. 364. 
 DEPARTMENT— 
 
 accounting, 126-137. 
 legal, 125. 
 
 manufacturing, 143-149. 
 ore and coal, 141, 142. 
 purchasing, 137-141. 
 purchasing (railroad), organiza- 
 tion of, 244-256. 
 sales, 149-165. 
 traffic, 166-168. 
 DIRECTORS— 
 
 and stockholders, 109. 
 and vacancies, 109. 
 duties of, 104-110. 
 election of, 88. 
 liabilities of, 110-113. 
 provision for, in by-laws, 77. 
 DISSOLUTION— 
 
 certificate of, 486. 
 DIVIDENDS— 
 
 of corporation, 82, 83. 
 DIVISION— 
 
 advertising, of sales department, 
 
 149-154. 
 estimating, of sales department 
 
 154, 155. 
 of accounts, 127-132. 
 of collections, 135-137. 
 of credits, 132-135. 
 order, 105. 
 rate, 166, 168. 
 selling, 163-165. 
 shipping, 166. 
 DOCUMENTS— 
 
 articles of copartnership, 375-382. 
 
 by-laws, 459-479. 
 
 certificate of dissolution, 486. 
 
 charters, 445-458. 
 
 contracts, 383-390. 
 
 corporation acts, 391-444. 
 
 t>roxy, 480. 
 
 DOCUMENTS— Continued 
 
 registered bond, 482-484. . 
 reorganization certificate. 484, 485. 
 stock certificates, 480-^482, 
 
 ECONOxMY- 
 
 individualistic, 3, 
 
 social, 4. 
 EFFICIENCY— 
 
 business, 186-224. 
 
 in investment, 189, 190, 
 
 of operation, 201-224. 
 
 technical, 186-189. 
 
 tests of, 221-223. 
 ENTERPRISER— 
 
 function of, 11, 28. 
 
 individual, 29. 
 
 factor of production, 11. 
 ENTERPRISES— 
 
 business, 
 
 inter-relations of, 168-185. 
 methods of conducting, 14-19. 
 organization of, 28-56. 
 ESTIMATING— 
 
 branch of sales department, 154, 
 155. 
 EXCHANGES— 
 
 stock, 108. 
 EXECUTIVE— 
 
 features of, 116. 
 
 functions of, 121-124. 
 
 responsibilities of, 119-121. 
 
 single V. plural, 117-119. 
 
 FACTORS— 
 
 of wealth production, 8-11. 
 FINANCE— 
 
 of corporation, 83. 
 
 GOVERNMENTS— 
 
 and business organization, 21-24. 
 GROUPS— 
 
 industrial, 19-21. 
 
 INCORPORATION— 
 
 articles of, 70-75. 
 
 certificate of, 70-75. 
 
 charter of, 70-75. 
 INDUSTRIES— 
 
 classification of, 19-21. 
 
 extractive, 19. 
 INFLATION— 
 
 of common stock, 67-70. 
 INTERESTS— 
 
 community of, 184, 185. 
 INVESTMENT— 
 
 accounting, 196-198. 
 
 LABOR— 
 
 problem, 202-215. 
 LABORATORY— 
 
 testing, of manufacturing com- 
 pany, 145, 146. 
 
INDEX 
 
 499 
 
 LAND— 
 
 a Cictor of production, 8. 9. 
 LEASK— 
 
 contingent, 184. 
 LEASING— 
 
 company, 184. 
 LEGAL— 
 
 department. 125i 
 LL\niI.ITY— 
 
 doulile, 45. 
 
 limited, 43, 44, 69, 70. 
 
 MAX— 
 
 a factor of production, 9. 
 MANAGEMENT- 
 
 business, R, 7. 
 
 defined, 6. 
 
 how accounting assists, 223, 224. 
 
 problem of. 219-224. 
 M A N U FA CT U R I N G— 
 
 department, 143-149. 
 
 organizations needed by, 20. 
 MATERLXLS- 
 
 raw. accounting of, 198-201. 
 MERGER— 
 
 defined, 185. 
 
 NEW JERSEY— 
 
 corporate policy of. 321-344. 
 
 OFFICERS— 
 
 of corporation, 78-82, 113, 114 
 ORDER— 
 
 division of sales department, lo:,. 
 ORE AND COAL— 
 
 department, 141, 142. 
 ORGANIZATION— 
 business, 
 
 accountancy in, 27. 
 
 and management (article), 1- 
 
 224. 
 industrial conditions afFectink'. 
 
 27, 28. 
 kind.s of, 28, 29. 
 political conditions aflfectine 
 
 21-24. 
 social conditions aflFectine. 2i- 
 27. 
 corporate. 40-168. 
 defined, 5. 
 functional. 121-107. 
 manapcrial, 17-19. 
 of railroad purchasing department 
 
 (article), 244-250. 
 principles of, 115. 
 railroad (article), 225-243. 
 required by commerce. 20. 
 required by extractive industries, 
 
 19. 
 required by manufacturing, 20. 
 required bv transportation. 21 
 social. 1 j-17. 
 
 ORGANIZATION— Continued 
 communistic, 14. 
 co-operative, 10. 17. 
 socialistic, 15, 16. 
 voluntary, 10. 
 
 PA RTNERSU IP- 
 defined. 32. 
 features of, 32, 33. 
 general, 33, 34. 
 limited, 34. 
 mininp, 34. 
 ordinary, 33. 
 origin of. 39. 
 special, 33, 34. 
 TLA NT- 
 location of, 190. 
 power. 140. 
 rRlCES— 
 
 problem of, 215-219. 
 PRODUCTION— 
 cost of, 189-190. 
 wealth, factors of, 8-11. 
 PROMOTER— 
 
 in modern business (article), 257- 
 
 275. 
 work of. 50. 57. 
 PRr)PRIETOR— 
 individual, 29-31. 
 
 advantages of, 29, 30. 
 I disadvantages of, 30, 31. 
 
 PROPRIETORSHIP— 
 
 individual, 29-32. 
 PROXY— 
 
 use of, bv stockholders. 89-91, 4«'0. 
 PURCHASING— 
 
 department, 137-141. 
 
 RAILRO.-xn— 
 
 organization (article). 225-243. 
 
 purchasing department (article), 
 244-256. 
 RECEIVER— 
 
 duties of, 362. 
 
 friendlv. 363. 
 RECEIVE'RSH I PS- 
 corporate. 360-371. 
 RENTAL— 
 
 direct money. 184. 
 REORGANIZATIONS— 
 
 corporate. 345-300. 
 ROONf_ 
 
 designing, 146. 
 drafting. 146. 
 tool. 147. 
 
 SALES— 
 
 department. 149-105, 
 SECRETARY— 
 
 of corporation, 79. 
 SELLING— 
 
 community of interests plan of, 
 150-158. 
 
500 
 
 INDEX 
 
 SELLING— Continued 
 
 company, 156-158. 
 
 contract system of, 159, 160. 
 
 direct, 161-165. 
 
 division of sales department, 163- 
 165. 
 
 factor system of, 160. 
 
 the goods, 155-165. 
 
 through the middleman, 155-160. 
 
 through the retailer, 160, 161. 
 SHOP— 
 
 in a manufacturing company, 147- 
 149. 
 SOCIALISM— 15, 16. 
 SOCIETY— 
 
 communistic, 14. 
 
 co-operative, 16, 17. 
 
 socialistic, 15, 16. 
 SPECIALIZATION— 
 
 results of, 4. 
 STOCK— 
 
 capital, in corporate charter, 73. 
 
 certificates, 480-482. 
 
 common, 63. 
 
 how determine amount of, 63, 64. 
 
 inflation of, 67-70. 
 
 preferred, 64-66. 
 
 provisions of, in by-laws, 76. 
 
 watered, 62. 
 STOCKHOLDERS— 
 
 liabilities of, 99-103. 
 
 provisions of, in by-laws, 77. 
 
 rights of, 87-98. 
 
 SYSTEM— 
 
 brokerage, 156. 
 
 commission, 156-158. 
 
 contract, 159, 160. 
 
 factor, 160. 
 
 map and tack, 165. 
 
 of rewarding laborers, 204-215. 
 
 bonus, 205, 206. 
 
 participation in ownership, 
 213-215. 
 
 pension, 215. 
 
 piece wage, 204. 
 
 premium', 206-210. 
 
 profit-sharing, 210-213. 
 
 TRAFFIC— 
 
 department, 166-168. 
 TRANSPORTATION— 
 
 organizations needed by, 21. 
 TREASURER— 
 
 of corporation, 80. 
 TRUSTS— 
 
 advantages of, 180. 
 
 disadvantages of, 181. 
 
 early character of, 288. 
 
 financial and industrial, relation 
 of, 287-320. 
 
 financiering of (article), 276-286. 
 
 formation of, 180. 
 
 UNITS— 
 
 business, 11-13. 
 
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