The sun. [volume] (New York [N.Y.]) 1833-1916, 1906-03-11
TEE ETHICS OF CORPORATIONS
PRESIDENT ELIOT POINTS OUT
THE MORAL PITFALLS.
Reiterates His Belief That Labor Monopoly
Mustn't BE EncOuraged-CenSures Pro-
fesslOnal Directors n Advocates
Laws Providing for More Publicity.

N flOl u ia u Wv
the Merchants Club at a banquet held
At the Auditorium Hotel tonight. Mr.
Eliot spoke on THE Ethics Of Corporate
Management" He said in part:
A large part Of the work of the world 1.
still done by individuals and partnerships
hut the corporation Ia tho great new factor
in modern business, the privilege of limited
liability heing the corporation = most precious
Characteristic. The principle of limited liza
hiltv is by far the most effective legal in ven
non for business purposes made in the nine.
,osnth century not that corporations have
not other advantages over partnerships, such
as tho ID vantaReou holding of real estate,
the easy tran sferenCe Of a stockholders
interest and convenien CO rs to suing and bein Z
sued but the fundamental advantage Of a
corporation. the advantage which enables II
70 mass and direct capital. Is the privilege
Of limited liability, Therefore, corpora
lions multiply and have become indispen.
sable,
II Is no wonder that the ethics of corpora
ton management are in some respects indie
terminate. and are therefore an urgent sub
iect Of public discussion: for the invention OF
the business corporation itself is hardly more
than fifty years old. and this new creation
deals with forms of property which are highly
novel.
~ lN at NphNVi hldN Nli' NlHl'S VI VI
business are not yet firmly settled? The
ethical con ventions grad ually agreed upon
during centuries concerning transactions in
the ancient forms of property have had to be
extended and adapted 10 immense new forms
Of property and new processes of production
end distribution. In making these extensions
and adaptations legislatures and courts are
In arrears; they have not been able to keep
up with the onward rush of eager and adj
.aU 80 htISinpES nuTtirnlur lT I'm fhiG
country. where industrial and commercial
enterprise is stimulated by a political and
social freedom heretofore unknown.
My subject is limited to corporation manage
nent, but this limitation Is not so strict as 1t
might seem at first sight, for 1t is impossible
to imagine that the ethics Of corporation
management should be different in kind
from the ethics which govern a partnership
or an Individual acting by himself or
through agents.
The scale of industrial operations can have
no effect whatever on the inherent rightful-
ness or wrongfulness OF the operations them
eelves, although the scale may have great
effect on the results of either righteous action
or unrighteous. 1t IL true. however, that
ethical questions arise in corporation man age
mont which do not so clearly, or so often,
arts, in Individual or pa partnership manage
ment and il IL also true that directors and
maDagers Of corporations need TO be con-
WINGED that corporations have souls. which
may be lost by just such conduct as would
cause the loss Of one mans soul, and that the
question. What does 10 profit a man to gain
the whole world and lose his own soul? applies
10 corporations.
In every enduring corporation there must
have been and must continue to be great
watChfulnsss to maintain and improve the
real foundations of its capitalization. At any
sta e Of any corporate business the questions
Of capitalization and DISQUALIFICATION may
come up. and II new capital Ia sought at a
period when industries are active and the
public is san guine, directors or mana gers will
be tempted to over-cap italization.
There are two aspects OF ov~er-capitaliza-
ton which demand the attention Of the pub
lie, In the first place. the several States Of
the Union have power to prevent the issue of
stock not fully paid for. If they see At to eX-
ercise that power. As a fact, legislation on
this subject ia not uniform: and the States
really compete with each other for the taxes
which may be derived from corporations es-
tablished within their respective borders.
This demoralizing competitions is. to say the
least. an abandonment by some states of their
true position as moral eachers
0vercaptialization is an evil because OF
Its effect on the state OF mind Of wa &c earners.
The alleged overcapitalizstion of a large
proportion of American industries mana ged
by corporations is one Of the main causes Of
the existing industrial unrest.
The common practice of declaring a divi-
dend In stock, the shares being issued to
actual shareholders at a price more or less
below the market price, presents some inter-
esting ethical aspects, In all kinds of cor
p~orations this practice tends to hide some OF
the real earning s of the corporation which
were in fact higher than the declared dIvi-
dends would lead the public 10 suppose,
When the dividend derived from these re-
served profits is declared in the form of rights
to subscribe 10 stock below the market price.
the stockholders of that moment receive an
extra dividend, the memory of which is soon
lost by the public. because II does not appear
Ii any future tabulation of the regular divi-
uends Of the corporation.
In the case of public service corporations
the practice is Objectionable because nothing
OF their transactions should be concealed.
Being a long delayed dividend, the stock
holders who receive IL will probably be in
Bone measure different persons from the
earlier stockholders at whose cost the aCcI-
mutation was made. For this reason, among
others, reserving profits is something less than
Just. unless the profits so reserved are put
into the wasting plant as requirements or
improvements. The best legislation in our
country on this sub 60 that Of Massachusetts
Adeclares that sue h a process is not equitable
In the case OF publ Q service corporations like
Railways, street "a lw .ys and light and power
Companies.
The methods used In what is called pro-
motion give rise tc a rye part of the current
criticism on CorpCIat on management. The
feward for skill ana success in promotion
pay reasonably and rightly be proportional
70 the amount of skill required to develop
the new enterprise and to the gravity OF the
risks TO he run, as we'll as TO the amount of
money which must be invested in It.
Two ethical principles ought, however.
70 govern all promoting schemes. In the
nrst place. all representations concerning
The immediate or future value of the bonds
and stocks issued should be absolutely true
as regards the facts stated. and moderate
and reasonable as regards the prospects of
future profit, Secondly, II years are going
TO be needed to develop the new enterprise
The promoters have no right to abandon the
undertaking SO soon as they have sold enough
ponds and stock TO give them an immediate
return in commissions or rakeofs.
Although the state of the law as to how
lar directors are trustees or 1duciary agents
IL somewhat hazy. there is no doubt con-
eetning several principles which should
govern the conduct of directors and deter
mine their selection. Thus, all the directors
OF a corporation are under obligations TO
rive their parSopaI attention and ViRilHut