Corporation
Before taking up the corporation, there is one other but
relatively unimportant form of business organization to be
noted.
A joint-stock association is formed by agreement among
its members, requiring no charter and no publication of the
articles. The capital is divided into shares, as in a corpo-
ration, and the shares are freely transferable. It may sue
and be sued by its president and treasurer, and its directors
are personally liable for its obligations after the property
of the association is exhausted. It exists by recognition of
statute.
A corporation is a wholly artificial person. It is recog-
nized by law and created in accordance with the legal reg-
ulation for carrying on undertakings of various kinds, public
or private, eleemosynary or commercial, financial or trans-
portation. We are concerned only with commercial or in-
dustrial corporations. As the corporation exists by pro-
vision of law, it has only such powers, rights, and privileges
as are expressly conferred by law. It has not the natural
and inherent rights possessed by an individual. This is one
of the principal distinctions between the position and con-
duct of the corporation and that of an individual proprie-
torship or firm. Smith, Jones and Robinson may start up
in business as a firm without notice to anybody, if they so
please, and do any and every kind of lawful business they
may elect to carry on. Excepting in the particular case of
a special partnership already referred to, no declaration of
their agreement, nor of their money matters, is required nor
need they declare their respective functions in the business.
They may think it expedient to make a statement of their
finances or of other details to their bankers, or to those
from whom they wish to buy on credit, but it is a voluntary
and private communication. If, however, they decide to in-
corporate as the Smith, Jones and Robinson Co. they must
file articles of incorporation with the secretary of State
and with the county clerk in the county where their prin-
cipal office is situated, declaring their purpose, defining the
kind of business they propose to carry on, and the amount
of capital with which they propose to operate. They must
secure from the secretary of State a charter authorizing them
to carry on business; and while the charters of large corpo-
rations especially are often very broad, a corporation is not
in general permitted to do any kind of business not fairly
included in the charter provisions; for example a company
incorporated for manufacturing may not generally engage
in banking, nor may a railroad company engage in mining.
The case of the " Coal Roads " illustrative of this point
is fresh in mind. The charter of the U. S. Steel Corpora-
tion is very broad, but very probably it could not legally en-
gage in the theatrical business in Pittsburg. Corporations
must state in their articles of incorporation the capital (that
is, the amount of money value) which they profess to devote
to the purposes of their business, and they must pay an in-
corporation tax and a tax annually thereafter on this cap-
italization. This capital, however, is often nominal, and
there is no general legal requirement nor provision for pub-
lic inquiry into the equivalence of the capital declared and
the value of the property and funds actually possessed by the
corporation, although New York State subscriptions to capital
stock must be paid in cash or in property at a fair valuation.
That is a matter in which the investor who is putting funds
into the corporation must determine for himself. The mar-
ket value of the stock of any going corporation usually ex-
presses the public estimate of its actual worth. There is,
however, a tendency of late (as part of the movement to
exercise larger governmental control of corporations) to
provide for some official physical valuation, especially of the
property of railroad corporations, with a view to larger
protection of investors against the deceptions of promoters or
of manipulators.
In financial make-up the firm and the corporation differ
thus : The proportions in which the members of a firm
share in the ownership and the results of business are fixed
by agreement among themselves. As a general proposition,
no new member may be admitted to a firm, no member may
retire, no member may transfer to another person all or
any part of his interest, without the consent of all the other
members of the firm or without adjustment of the debits or
credits of the firm to date of change. In a corporation the
total capitalization is divided into a fixed number of shares.
Each of these shares has a definite par value usually
$100, though some large industrial companies have shares
of a par value of $50 and many mining corporations divide
their stock into shares of a par value of $10, $5 or even $i.
These shares are commonly sold in the first instance by
public subscription or given in exchange for properties,
patents, etc., and thereafter are transferable without restric-
tion, passing from hand to hand in the open market, pur-
chasable by anybody in any quantity that market condi-
tions permit. In the case of the large corporations listed
on the exchanges, the stock is traded in to the extent of
thousands, tens of thousands, and even hundreds of thou-
sands of shares a day. Each transfer is recorded if de-
sired by the buyer on the books of the corporation. The
buyer brings in the old certificate endorsed by the former
owner, with proper witnessing signatures, and receives in
exchange a new certificate issued in his own name. The
corporation recognizes as voting members those stockholders
whose names are registered on its stock ledgers at any given
time, and the voting power of each shareholder is measured
by his stock holdings. Thus the membership in a corporation
may be and usually is constantly shifting, both as to persons
and proportion held by each.
There is another very important financial difference be-
tween a corporation and a firm. In a firm, as we have al-
ready seen, each member (except a special member) is like
an individual proprietor in that he is liable to the extent of
his entire possessions for the liabilities of the firm. Now a
stockholder in a corporation is not usually liable, either for
its debts or its wrongful acts, beyond the amount of his
stock. That stock may become valueless because all the
property of the corporation is exhausted, and so the stock-
holder may lose what he has put in; but the creditors or the
holders of a judgment against a corporation can not go be-
yond the property of that corporation and attach property
of the individual stockholder. In former times, under the
old law of corporations, a creditor could do so, and in one
famous case in Scotland, the case of a bank, if I remember
rightly, every stockholder, no matter how small his holding,
was ruined by the failure of the bank, the successive assess-
ments to meet the debts of the corporation exhausting finally
the last shilling of the last man. In some places and in
some kinds of corporations there still exists what is called
" double liability." That is, each stockholder may not
only lose originally what he put in, but he may be com-
pelled to pay in addition an amount equal to the ^par value
of his stock holdings if this is necessary to meet the obliga-
tions of the company. This is the case with all national
banks, but with manufacturing corporations it is exceptional
and as a general proposition there is no liability and no as-
sessment collectible beyond the single value of the stock
each member of the corporation holds.
The management of a corporation is vested in a board
of directors elected annually by the stockholders. These
directors in turn elect the officers of the company and ap-
point its chief officials. The law requires that there shall be
certain specified officers, in New York a president, a secre-
tary, and a treasurer. Other officers may be added if de-
sired. Very frequently in large corporations there are sev-
eral vice-presidents, each heading one of the principal di-
visions of the corporation's work. One, for example, may
be a financial man and look after marketing of bonds or notes,
loans, and banking and financial affairs generally; another
may direct the commercial or sales department; a third may
be a technical man in charge of manufacturing or produc-
tion; a fourth may be a lawyer and control the legal work,
the drawing of contracts, patents, etc. The general man-
ager, who is the active executive official in direct charge of
the principal activities of the corporation, is very often, per-
haps generally, not a director, although in many cases the
president or vice-president is also general.manager.
Directors are elected for a term of one year by a majority
vote of all the stock represented at the meeting. A single
share may thus determine the control of a large corpora-
tion. In our larger and better companies, however, it is
generally conceded as a moral right that a large unified
minority interest shall have representation on the board of
directors. If " cumulative voting " is provided for in the
constitution of the company, a respectable minority may be-
come actually able to elect a director, irrespective of any
moral right to representation. The amount of freedom
given to individual officers or officials (freedom, that is, to
act without prior approval by the directors) naturally varies
greatly with the circumstances. Very generally, an exec-
utive committee of limited membership, easily got together
for consultation by the general manager, has plenary powers
and decides even very important matters without calling to-
gether the full board, merely reporting its action for con-
firmation at a later regular meeting. But in an issue, the
majority vote of the board of directors decides. You often
see, therefore, a struggle for control of a large company
thrown into the stock market, both sides striving to buy up
floating stock so as to control votes in the election of a board
of directors who will carry out their policies.
There is an old saying that a corporation never dies.
Even a corporation may be extinguished under proper legal
procedure by settling all its obligations, dividing its assets
pro rata, and surrendering its charter. But a corporation is
not affected as to continuity by the death of any individual.
It is immaterial to its mere existence who owns any part of
its stock. An individual proprietorship or firm, on the
other hand, may be very seriously embarrassed and even
unwillingly forced to wind up by the death of a sole owner
in one case or of a partner in the other. Some difficulty or
embarrassment in administering the estate of the deceased,
some quarrel among the heirs if no one interest is strong
enough to buy out all the others, may leave no alternative
except to close out the business. But as the corporation is an
artificial entity, wholly independent of any of its component
members, it goes on unaffected.
For this reason, as well as on account of the limitation of
liability already spoken of, a corporation is strongly favored
even for businesses which are essentially proprietary. A
man may make a stock company of his own business, dis-
tributing just enough shares to secure the legal number of
stockholders, and electing officers from members of his own
family or entirely trustworthy friends, and thus may give his
business a form in which it may be perpetuated without dan-
ger of immediate collapse at his death. For this and other
reasons industrial undertakings in the United States tend
more and more to be conducted under the form of an in-
corporated company.
The money paid in by the stockholders when the com-
pany is first organized is its capital stock or capital. This
is used to provide (or, as already noted, it may in part al-
ready have the form of) buildings, machinery, patents, and
equipment. That part of the capital which is not perma-
nently crystallized in these fixed forms that part which
remains in " liquid " form is called the working capital,
in centra-distinction to the other or fixed capital. As earn-
ings or profits begin to come in and accumulate, the total
value of all the assets of the company becomes something
more than the original capital. This excess value is called
surplus. From time to time, if the directors think wise, a
portion of the accumulated earnings is distributed pro rata
among the stockholders, profits so distributed being known
as dividends.
That portion of the property of a corporation which con-
sists of money or things which can readily be converted into
money, such as good accounts due the company, bills receiv-
able, marketable securities belonging to other corporations,
or perhaps even readily salable merchandise, is called the
" quick assets " of the company; while that portion consist-
ing of buildings, machinery and equipment installed, patent
rights, etc., which can not readily be turned into cash, is
called the fixed assets of the company. This is a classifica-
tion which has nothing to do with capital and surplus. A
large part of the capital of the company might be in the form
of quick assets, while conversely all its surplus might have
gone into a form in which it can not be converted into money
at all, as, for instance, in the case of a telegraph company
which constantly put a part of its surplus into extending its
lines.
A corporation may usually buy, own and hold the stock
of another corporation just as an individual might own it.
But in the case of railroads, this right has of late been con-
siderably limited and abridged by statute. For conven-
ience, to segregate its activities, or to avoid overstepping its
charter, a large corporation will often organize a subsidiary
corporation to carry on some contributing industry. A steel
company might thus organize a subsidiary transportation
company to haul its ore or products, or a subsidiary mining
company to produce the ore, or a subsidiary tin plate or wire
mill to work up its products. The parent company might
then own all the stock of the subsidiary, appoint all its di-
rectors, and receive all its dividends, which would then go
to swell the profits of the parent concern. Or it might sell
part of the stock of the subsidiary companies in open mar-
ket, retaining only a majority control.
There are many other applications of corporation law
such as the organization of a holding company, or a con-
struction company, which are of high ingenuity, but too
frequently of very low morality. Many of them are de-
signed to evade the intended limitations of corporate powers,
or perhaps to segregate all the assets in the unassailable pos-
session of one corporation, while all the liabilities are in-
curred by another. These devices are not creditable to
American finance, and the evils they have created, the
abuses to which they have given rise, are the prime cause of
the public hostility toward corporations which is causing the
present industrial disturbance and preventing a full meas-
ure of industrial prosperity. Such legal and financial
legerdemain has no place in our consideration. We are con-
cerned only with a brief general outline of the principal in-
stitutions by which industrial operations are carried on; and
having now broadly sketched such an outline, we will pro-
ceed to an equally rapid survey of the methods generally
followed in the particular department in which we are spe-
cially interested the manufacturing or production de-
partment of a large organization.
