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Our “Voting” Stock


ISSUE:  Summer 1932

I

One of the deeper mysteries of finance which troubled my youth was a matter of etymology. Where did “preferred” stocks acquire their snobbish name, and why were certain other stocks so scornfully called “common”? The present year, it is true, is demonstrating just how common a common stock may be, but even with omitted dividends this class of stock enjoys one advantage denied the preferred—the voting privilege.

In this voting privilege lies, perhaps, the future of big business. Certain parallels with political evolution are evident. Politically, when men gathered into ever larger groups some form of control was necessary. Tribal chieftains grew into oligarchies, kings, emperors — first absolute and then limited—and now finally most of the civilized world has, for better or for worse, thrown its lot with the ideal (and to some degree with the practice) of democracy. Similarly, as business has grown from one-man industries to vast co-operative enterprises, it has divided authority in partnerships, put it under certain group controls in guilds, devised oligarchic boards of directors, and more recently incorporated itself under charters that are similar to political constitutions and, with its voting stock, given itself the trappings of industrial democracy.

No one seriously pretends that this is an efficient arrangement any more than a political democracy is efficient. Undoubtedly an absolute monarchy is the best government—if only one can be sure of a wise and unselfish monarch and a succession of his kind. But as powers have grown in government and in business, men have no longer been willing to trust one of their number with such vast authority because of the temptation it offers toward selfish use that may be socially disastrous. They have sacrificed some measure of efficiency for social control, or tried to do so.

Critics of our political democracy are numerous, but at least the cannonading has died down. These days when speaking of politics one has to be apologetic; it is rather quaint and old-fashioned, like duelling. Economics is in the saddle. While politicians sit on the side-lines, industrialists joust for the fortunes of Europe and an engineer directs the government of the United States. It is industrial and not political democracy that is today’s problem and may be tomorrow’s battleground.

It may be well to examine our present state as regards this alleged industrial democracy. We shall not interpret the term too broadly. For the present we shall omit all consideration of the proper share of employees in management, or of the consuming public as represented by government. We shall speak only of the share in control exercised by the owners of businesses, the shareholders, and especially of the way this control works out in practice through the democratic gesture of stock with voting rights.

II

Possibly the best way to discover the truth is to see what actually happens in a representative case—to attend a stockholders’ meeting. Many readers have done this or are in a position to do so. But in order that we may have an experience in common, we shall attend one such meeting together. Care will be taken in the choice, for obviously in a company where fifty-one per cent of the stock is in the hands of one man or one group of men the “voting privilege” is the merest joke. We shall, in fact, choose a corporation in which no single individual owns more than one per cent of the stock outstanding, and where the chances for true control on the part of shareholders seem very favorable.

The corporation chosen will not be named. It is one of the largest corporations in the country, boasting of more than half a million shareholders and making a product of which there is one in use for every six persons in the United States. Its directors are men of outstanding ability, some of whom have achieved world fame. If this account of one of its annual meetings has certain amusing details which seem to imply criticism, the criticism is of the system and not of the corporation. It is precisely because this corporation follows the “voting stock” system with such meticulous care and under conditions unusually promising that it furnishes so revealing a study.

The meeting was held on the last day of March, 1931. Notices were duly sent to the more than 500,000 stockholders, outlining as the special business of the meeting the election of directors, voting upon the issuing of half a billion dollars’ worth of additional stock, possibly extending the term of existence of the corporation “so as to make it perpetual,” and “such other business as may properly come before the stockholders.” Surely, here was important business. The invitation for personal attendance was not especially cordial, but it was urged that all the stock be represented, and “attached will be found a form of proxy which, if you cannot be present in person, you are requested to sign and forward.”

The proxy named three men, all directors of the corporation and one its president, to exercise “all the powers the undersigned would possess if personally present. . . .” It was not even stated how these three men proposed to vote on the matters outlined, though the implication was that they were in favor of them. Here was a case of “unin-structed delegates” with a vengeance.

At the appropriate hour some two hundred and fifty persons assembled in the offices of the company in lower Broadway, out of the more than half a million entitled to attend and vote. Even this corporal’s guard seemed to be more than were expected, for there was some difficulty about seating them all. Of the two hundred and fifty, thirty-six were women (doubtless in proof of equal rights in industrial democracy) , about one hundred were gentlemen of middle and later age with “directors’ stomachs,” some fifty were lean young men who might have been university students coming merely to observe, and the remainder were Tom, Dick, and Harry stockholders even as you and I.

The president, a spare, efficient man, called the meeting gravely to order. The minutes of the previous meeting were read and approved without comment. The annual report of the directors, involving a construction program of $585,-000,000, relationships with 400,000 employees in a year when employment policies were more widely criticised than at any previous time in recent history, and net earnings of $267,874,000—this report was referred to, and its adoption moved-seconded-carried without a single word of comment.

The next business was the election of directors. Printed ballots were distributed bearing the names of the existing directors with one substitution. The polls were solemnly declared open. A talkative usher whispered that we need have no fears; “they” already held proxies for more than half the outstanding stock. The ballots were collected, the ever-careful president gravely asked whether everyone had voted who wished to vote, and the polls were solemnly declared closed. The meeting was recessed for a few minutes while the ballots were counted. In about eight minutes the result was announced. The votes cast totaled 13,087,595. The vote for A. was 13,087,595; for B., 13,087,595; for C, the same; and so on for D. and E. and the whole nineteen, all elected with this comforting unanimity. No one seemed in the least amused at the spectacle of three of the directors (those named on the proxies) giving themselves most of this overwhelming vote, all without the owners of the stock so much as knowing who were up for election.

The next business was the question of increasing the capital stock of the company by half a billion dollars. This is a sizeable item and some discussion might have been expected. There was none. The polls were formally declared open, the ritual of asking whether every one who cared to vote had voted was duly acted out, and the polls were formally declared closed. While the vote was being counted a stockholder rose to his feet and made a somewhat lengthy oration on the wonders of this particular company, its services to mankind, and the splendors of its efficient management. There were titters here and there and it was whispered that he always managed to have his say on something at every meeting. When the speaker, rather red of face and pleading another engagement, finished his eulogy and left the room, he was roundly applauded. His was the only speech of any sort made by any stockholder during the meeting.

The tellers were ready to report. Apparently the unanimity of the previous vote had disturbed some of the members of this great industrial democracy. This time there were 169 negative votes against 13,083,967 affirmatives.

The final business was a vote “to extend the term of existence of the corporation so as to make it perpetual.” All the grave and solemn ritual of voting was again indulged in, but by this time many of the people were getting restive and leaving. The insurgents had now grown weaker. Amid mild amusement it was announced that nine negative votes had been cast. There were 13,083,389 affirmative. Adjournment was moved, seconded, and passed.

A corporation of half a million stockholders had approved its annual report, elected nineteen directors, increased its capital stock by half a billion, and made itself perpetual— all in exactly fifty-seven minutes. A total of 274,831,839 votes had been cast and counted, all of them affirmative except 178. In brief, the opposition amounted to the less than microscopic figure of six one-hundred-thousandths of one per cent.

A meeting of the Board of Directors was held directly after the shareholders’ meeting.

III

If the delusion remains that the small holder of voting stock, or all the small holders together, have any significant part in determining corporation policies, it is a persistent delusion indeed. Of course opposition in the sacred Inner Circle may result in circularization of the stockholders by both parties, and then voting proxies may really mean something. But so long as a decent unanimity is preserved in the corporation offices, the voting privilege is a farce in practice however democratic it may appear in theory. Exhaustive evidence of this fact is presented in Professor William Z. Ripley’s arraignment of corporation law in his very stimulating book, “Main Street and Wall Street.”

It may be maintained that this is as it should be. Perhaps sufficient knowledge of the business of the particular corporation and of economics in general does not inhere in the average stockholder so that he should be allowed a vote. There is a strong argument that the present hollow forms of shareholder democracy with actual centralized control is good for business. Certain dangers suggest themselves, however, and they are growing dangers.

Recent years have seen mergers and consolidations to an extent not equalled even in the days of anti-trust agitation. The individual grocery store is swallowed up in a colossal chain. A bank acquires so many branches that its failure throws a whole great city into financial panic. The railroads of the East merge. Whole industries are brought effectually under individual control by interlocking stock holdings and directorates. The concentration of such tremendous power in relatively few hands increases the temptation toward selfish and unsocial use. Unless the newly developed big business builds from within itself democratic controls that shall be genuine and adequate, it may confidently expect such controls to be forcibly imposed from without.

The present arrangement has also all the dangers of any separation of real and nominal authority. In spite of stressing the “service” ideal to the point of nausea in recent years, corporations in actual practice appear to have at best only the most embryonic souls. The directors are able always to point to the rapacious stockholders as preventing them from pursuing a more liberal policy, while the stockholders—who in the unit are you and I, not particularly rapacious or unsocial or unsympathetic—have no effective control nor even a way of getting a hearing.

A practical example of the result is the way big business has failed to meet the present unemployment crisis. One corporation, whose officers are men of outstanding importance and public spirit and whose president is actively engaged in unemployment relief, cut its working force in a plant known to the writer from 1,057 to 403, last year, and found it necessary to “readjust” its national construction program by a reduction of $135,000,000. This is in spite of the fact that it earned its full dividend requirements in the year preceding, and carried an additional $21,000,000 over into its surplus.

This retrenchment, all “in the interests of the stockholders,” will throw a small army of additional men out of work, cause the surrender of mortgaged homes, wreck health through inadequate food and lowered living standards, and result in such discouragement and distrust on the part of the workers that many of them will never return to the ranks of steady and dependable employes. It will do its vicious share in spreading the widening circle of depression and unemployment.

If such facts were presented to the individual shareholders there is reason to believe the directors might be authorized to continue work at its present level by putting in permanent improvements, even if it were necessary to cut into the existing large surplus or slightly to reduce the dividend.

This might not be good immediate policy, but it would be following the higher economics of ultimate good. Capitalism is on trial these days. If it is to survive, if a few decades from now there are to be “dividends” at all, it must prove its superiority over other economic systems already clamorously recommended. It must probably show itself as willing and able to protect the worker in lean years as now it is to profit inordinately by his labor in prosperous ones. Only a genuinely democratic control of big business is likely to approve and enforce such a higher economics.

IV

The question of how such control can be secured is admittedly difficult. It will require the best efforts of trained economists and practical business men, working together. Certain broad suggestions along which further discussion may develop are here presented, none of which is new or particularly revolutionary.

Since the number and wide geographical scattering of the shareholders in many companies make any true democratic assemblage impossible, the matter of proxies is a key question. Instead of vesting other parties with the voting power they convey, they might be in the form of absentee ballots with provision for a vote on each significant question announced for the meeting. If this were done, it would be necessary to “educate our masters,” as went the phrase in England when the franchise was extended. A summary of the arguments in favor of each proposal could be prepared by its proponents, and a similar summary by the opposition. Before the time of meeting a definite opportunity should be given stockholders to suggest new business that in their opinion required attention.

Where existing charters cannot be changed to permit absentee voting, there might at least be a provision obliging the person to whom the proxy is granted to vote in accordance with any expressed wish of the owner of the stock.

It is entirely possible that the whole present system of basing the number of votes upon the amount of stock held will be challenged. Even in politics the question of whether votes shall be by man, territory, or wealth does not seem to be permanently settled.

The reader will recall the pleasant tiff on this subject between Senator Grundy of Pennsylvania and the late Senator Caraway of Arkansas. The former senator from Pennsylvania was willing that representation should be in proportion to population in the House, as at present; but in the Senate he thought it should be, not on the present basis of two senators for each state, but on the basis of comparative wealth. This would give a wealthy state like Pennsylvania a considerable number of senators, while limiting “backward” states (like Senator Caraway’s Arkansas) to one. Senator Caraway, who was on the Senate Committee which investigated the notorious election frauds in Pennsylvania, is reported to have replied that even the great wealth of Pennsylvania could not finance the election of multiple senators at prevailing rates.

The mere suggestion that political power be distributed on the basis of wealth is so contrary to the conventional ideal of democracy that in America it is not seriously considered. Nevertheless in business, which in this day affects our lives more intimately than politics, exactly the contrary is true, and the vote-by-wealth practice is almost universal.

There are exceptions. For example, in the city of New York a corporation with a membership of more than three thousand operates on these refreshingly different principles:

Each member over sixteen years of age shall be entitled to one vote only. No vote by proxy shall be permitted.

On the request of twenty or more members, the Board shall provide a method by which absent members may vote by referendum ballot on specific questions.

In an ordinary business, a majority of the shares run the business. In this organization, a majority of the members run the business.

The shares which any one member may hold shall not exceed in value five per cent of the paid-in capital stock.

Payment of annual interest on stock (technically dividends) shall not exceed six per cent.

Additional earnings are paid back to customer members as rebates in proportion to the amount each has paid for service.

Similar principles apply to many other organizations operating in the United States and Europe—indeed to all the “co-operatives” organized on the Rochdale plan.

It will be seen that there is here a fundamental difference in viewpoint. The co-operatives are organized for the benefit of the consumer, and the opinion of any consumer is as valid as that of any other as to how the business should be run. Other enterprises, however pious their utterances about service and however effective their services may actually be, are organized for profit and the control is quite logically assigned to the profit-unit, the share.

It is not in the scope of our present discussion to compare the merits of the two systems, especially as these merits will vary with the type of business to which the systems are applied. For present purposes it is enough to point out that the tremendous industrial combinations of the day represent a concentrated power that for safety must in some manner be placed under a diffused and democratic control; that “voting stock,” which might seem to offer such a control, is in fact an amusing and meaningless sham; that the evils of the present system can be corrected if the will exists, giving an entirely new social tone to business enterprise; that if big business does not put its house in order, other economic systems with all the appeal of novelty and more popular control may supplant it—for better or for worse.

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