Fifty years in Wall Street
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CHAPTER LXXIV.
NEEDED PUBLICITY AND REFORM IN CORPORATIONS.
Years ago I saw the inevitable end of the methods of some of the
unscrupulous managers and manipulators of corporations, and began to
agitate the employment of certified public accountants to examine into,
and report to the stockholders, the true condition of the companies
involved. Had my suggestions been adopted there would have been little
cause for the recent investigation by the government officials, as the
reform now sought would have been accomplished long before the present
stringency of money became a disturbing element all over the world, and
would not have led to the semi-panicky conditions which prevailed so
disastrously in 1907. An address on “Publicity and Reform,” which I
delivered before the Wharton School of Finance, University of
Pennsylvania, in April, 1906, includes my urgent adoption of the policy
I have referred to, and reads as follows:
We live in a progressive age, and we are at present passing through a
period of salutary business reform. This reform means improvement, and
business men of all kinds should help and not retard it. The banking,
railway, and insurance communities should, in particular, do all they
can to promote it and invite the fullest publicity as to their
transactions and methods of doing business. In this connection the
opposition developed in the New York Legislature to the investigation of
the banks was a mistake of judgment, because it was calculated to excite
distrust, whereas willingness to submit to thorough investigation would
allay it.
This opposition drew more public attention to the agitation for a
general bank department examination than would otherwise have been
attracted to it, and the unwillingness to submit to it suggested that
there was a screw loose, or something to conceal in connection with some
of the State banks; and that they were therefore vulnerable to attack,
or at least open to criticism. This suspicion those concerned should
have avoided by not only boldly facing the legislative music, but
inviting it and leaving everything open and above board. Corporations
and banking and mercantile firms that become at all objects of suspicion
should, in their own interests, speedily clear themselves, by inviting
the fullest examination and publicity. Unsoundness and irregularity, if
such existed, would thus be exposed and weeded out, instead of being
nursed in secret, and so doing harm and impairing confidence in
corporations and firms perfectly sound and regular in their methods and
practices. The sound concerns would stand better than ever after passing
through this ordeal of publicity. The New York Legislature, as well as
the Legislatures of the other States, should respond to the popular
agitation for publicity by passing laws requiring all corporations,
including banks and trust companies, to make at least semi-annual
reports of their condition, certified to by registered public
accountants, with power invested in the State Superintendents to order
special examinations by such accountants, at any time, when deemed
necessary; that is, whenever they were suspected of being unsound or
irregular in their business methods. This should be done for the
protection of others as well as to clear them of suspicion and restore
their credit, if found to be sound and straight. Only the insolvent and
the crooked would have anything to fear from this wholesome publicity.
In this way disaster might be averted and impaired confidence promptly
restored. I lay stress upon the employment of skilled accountants
because the certified results of their examinations would be accepted as
conclusive of the actual conditions being as they stated or described.
They would speak with authority. It should be made a felony for an
accountant to make a false or misleading report, and he should ever
after be disqualified from practising.
To meet the growing demand for them, every college and university should
have a department for the special training of accountants, who on
graduating should receive a diploma or degree, as in the medical or
legal profession. Already the position held by certified accountants is
high, but it should be raised still more by the action of the
universities and colleges. Some of these have established departments
for accountants, where the students undergo thorough training by men who
have had practical experience in the profession, but all institutions of
learning ought to have them and maintain them in a high state of
efficiency in view of their importance to the business community. The
opposition to publicity shown by the New York State banking interest, as
represented in the Legislature, where it has choked off probing, has
thereby aroused fresh suspicions and much adverse criticism. It is not
surprising that many are led to suspect that there is much concealed
that ought to be revealed.
The strong desire for secrecy in the management of corporations,
especially with life insurance companies, is obviously in defiance of
public sentiment, and the Legislature should now make the house-cleaning
thorough while it is about it. If it does less it will fail in its duty.
It is indeed very surprising, under the circumstances, that the officers
and trustees of the great life insurance companies should have supposed
that anything short of complete cleansing and purification would satisfy
their policyholders and the public.
The bankers of the country are, more or less, intimately concerned in
seeing this Augean insurance stable thoroughly cleaned out, for, unless
it is, distrust will linger, and the life insurance taint will, more or
less, continue to extend to the banks, bankers, bond dealers, and trust
companies, with which the life insurance companies necessarily have to
do business.
For the banking interests to virtually ignore the past, and say to the
life insurance companies, “Go, and sin no more,” would be
pusillanimously evading the requirements of the situation. The cloud
that drifted over Wall Street from the insurance investigation must be
entirely dispersed by the fullest investigation and publicity and the
establishment of a new regime in insurance management and its banking
methods and affiliations.
It is the duty of life insurance trustees to co-operate to this end, and
for them to refuse to do so is to imply consciousness of their own
inability to stand the searching ordeal. If such there be, owing to
their purchases or sales of securities, in connection with their
respective companies, or any other doings that cannot bear the light or
are open to criticism, they should be ventilated and exposed without
fear or favor.
The efforts to smother further life insurance investigation, which had
their counterpart in the opposition to the proposed banking department
investigation, should be frowned down by public opinion, both in the
interests of morality and good business practices. The banks and the
banker should, like Caesar’s wife, be above suspicion, and not less so
the life insurance manager and trustee.
Turning to the railways, we find the need of stricter laws in matters
that favor a few at the expense of the many, as, for instance, in the
giving of rebates. To prevent these, not a mere fine, which can be
easily paid, should be imposed, but the offence should be made a
misdemeanor, punishable with imprisonment. Railway officials would then,
with the danger of an indictment and a term in prison before them,
hesitate to violate the law. For their own reputation, as well as for
the sake of their families, they would be likely to avoid that secret
and unlawful rate-cutting, disguised by the payment of rebates, which
has done so much in the past to foster unholy monopolies and crush
competition to the ruin of thousands.
In the lime-light of publicity the irregular rebate practices of the
railways, for the benefit of large and favored shippers, would be
impossible; and equally so would have been the go-as-you-please and
extravagant management of the life insurance companies as revealed by
the insurance investigation. Under the new order of things, regulated by
stricter laws, it should be made impossible for these irregularities
ever to occur. The death-knell should also be sounded by these stricter
laws and reforms of much of the “graft” that has been epidemic in
political and business life. Publicity of accounts would be a protection
to all solvent concerns and expose and eliminate the unsound and the
fraudulent that would otherwise be a menace to them, and it should be
welcomed by all who have nothing to fear from such publicity.
We are passing through a reform—yea, a revolutionary period in business
affairs. But good will come out of it, for with our improved business
methods will come a higher sense of responsibility and a keener
perception of duty, which cannot fail to inspire correspondingly greater
confidence and produce more certain results. We shall thus have more
conservatism in business and fewer speculative hazards and crookedness
than before.
Therefore, let the march of reform be unimpeded, for it will lead us to
a higher financial and commercial eminence than even that on which we
already stand, and hasten the time when this country will be the world’s
greatest financial and commercial centre.
It would seem that many need more conservatism and prudence in their
business ventures, and they would be the better for having the
lime-light of publicity thrown on them. When the sky-rockets of the
business world fall they are not the only sufferers, for they injure
others who are perfectly sound and conservative by creating distrust of
all.
The accounting and publicity I advocate would expose, check, and prevent
the irregularities and the one-man power abuses that have ended in so
many collapses. The one-man control of large corporations must come to
an end. An ounce of prevention is better than a pound of cure.
Corporations, too, should show that they have souls by not neglecting
the welfare of their employes. They should promote their health by
giving them healthy surroundings where they work, and also by making
graduated provision for old age service, or pensions in case of
disability, after long service. This, or giving them a share in the
profits of the business, would do much to narrow the gulf between labor
and capital.
The one-man power in large corporations, with a lot of dummy directors
subservient to it, should also come to an end. Dummy directors are no
better than so many decoy ducks that mislead the public. They are
directors who do not direct, and are not expected to direct by those in
control who selected them for election. They are consequently a false
pretence. No man ought to accept a place as director or trustee of an
institution, or corporation, particularly in a banking, railway,
industrial or life insurance company, who does not fully appreciate the
responsibility of the position and the care and vigilance it demands,
and intend to faithfully and conscientiously perform its duties. To
intentionally become a dummy director is reprehensible, and directors in
dealing with the officers of their corporations should have opinions of
their own and not be afraid to express them. They are not alone
responsible for their own errors or wrongful acts, but for failure to
expose and put a stop to the wrongdoing of the officers or employees
under their control, and they should not assume such duties when they
cannot properly attend to them.
I once knew a man of very great business renown, who during the last
thirty years of his life was much sought after because he possessed the