page_title: William H. Lough
section_title: Legal character and requirements of the corporation
hierarchical_section_title: William H. Lough / Work / Corporation finance, 1909 / Legal character and requirements of the corporation
caption_attribution_description: English: Chart of Interborough-Metropolitan System, New York, 1909
context_page_description: William Henry Lough, Jr. was an American economist, and Professor of Finance and Transportation at the New York University School of Commerce, known for his work in the field of corporate finance.
context_section_description: This book is primarily descriptive of the methods of promoting, organizing and financing corporations, and all the illustrations are taken from the experience of American companies. In the first six chapters the author deals with the legal character and requirements of the corporation.
  In the chapter about the interior organization Lough goes into the powers and liabilities of directors. Lough started explaining that "in theory, however, even if not in practice, a board of directors is supposed to represent all the stockholders equally. Partly for that reason the board... is given complete control over the corporation's assets and officers." Also in the organization, there is a "centralization of control,' which can be compared to a double pyramid (see image). Lough explained:
  The base of one pyramid represents the body of stockholders or owners of the corporation who delegate their rights as owners to the directors, who in turn transfer all active authority to the president or other chief executive officer, who is at the apex of that pyramid. The other pyramid represents the subordinate officials and employees of the corporation. The chief executive officer is also the apex of this pyramid and transmits his orders through the various grades of subordinates to the clerks and laborers at the base of the pyramid. Thus responsibility and authority conferred by the stockholders and exercised over the employees are both centered in this chief executive officer. It is an organization almost ideally adapted, so far as efficiency and economy go, to the conditions of present-day industry.
  Overall the first six chapters of the book contains little that is new. It is derived, as the author suggests, largely from Thomas Conyngton's The Modern Corporation (1910). Worthy of notice in this part, however, is the distinction which Professor Lough draws between "the parent company" and "the holding company." Lough stated:
  A parent company is one that for some reason does not desire to carry on operations in its own name over the whole country, and which therefore organizes and holds all or nearly all the stock of one or more subordinate companies... A holding company proper on the other hand, using the term in a financial, not a legal sense, comes into existence for the purpose of buying control of pre-existing companies. Its ostensible object is the buying of securities of other corporations to be held for whatever revenues they will produce. The real object of its existence, however, is not accomplished unless it holds control of all its subsidiary companies and directs their operations. Sometimes this control consists in holding a bare majority of the voting stock of the subsidiary; but it is generally advisable to secure as much stock as possible, for the greater the extent of the control, the more readily may the holding company carry out its plans to achieve economies and fix prices.
  Lough also noted that "holding companies may be formed, not only to acquire stock of operating companies, but also to obtain control of other holding companies." Such organization can become rather complex, and any examples may require considerable explanation. Lough continued:
  The reader will get a sufficiently clear idea as to how complex organizations of this kind are built up if he will study the accompanying chart of the Interborough-Metropolitan Company, which was prepared for the Public Service Commission of the First District of the State of 'New York. The Interborough-Metropolitan Company controls all the street car, elevated and subway railway lines in the principal boroughs of New York City. It was formed, as shown in the chart, by an exchange of its securities for the securities of two formerly competing companies, the Metropolitan Securities Company and the Interborough Rapid Transit Company. The relations of these two companies to each other, to their direct subsidiaries, and to the subsidiaries of their subsidiaries, are as clearly as possible presented in the chart."
  To illustrate further the extent, as well as the complexity, Lough gave
caption: Chart of Interborough-Metropolitan System, New York, 1909
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