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CHAPTER IX.

PROXIES.

AMONGST other obvious conditions which have made speculative control possible, our enquirer can scarcely fail to be struck by the circumstance that, in the past, there existed a remarkable divorce between the possession of stock and the voting power properly incident thereto. It is of course true that some fifteen or twenty years ago there was not the same craze for direct representation in every department of life or business which characterizes the life and politics of to-day. But it will strike him as a strange thing that one set of people should have paid for and own the stock of a railroad company, and that the voting power should be retained by Directors who, by virtue of that very fact, would have the option of running a railroad in the interest of a speculative clique, instead of in the interest of its real owners. The injury which in the past has accrued to foreign investors from the existence of this system of course admits of degrees, according to the circumstances of each particular case. But, in very extreme instances, the results have been in different aspects both disastrous and ridiculous. Take, for instance, the case of the Erie Road in the palmy days of the notorious Erie Ring. A corrupt Legislature at Albany controlled by Mr. Tweed and his friends had passed the Erie Classification Act, by virtue of which only a small proportion of the Directors could be retired at annual elec

tions, thus leaving the power incident to a majority chronically vested in a compact and highly organized party. Now it happened that the Company had no power to issue directly an unlimited amount of new stock at the discretion of Directors, who might for any reason desire to water the capital. But, by the manipulation of a power vested in the corporation, it was permissible to issue bonds convertible into stock; and this power, from the point of view of the Ring, was sufficient for all practical purposes. The mode of procedure was, on an electoral emergency, to issue (say) five or ten millions of dollars of convertible bonds; next to convert them into stock, and then to leave the stock standing in the name of one or more of the Directors or their brokers or agents. The certificates were sold upon the "Street" at a nominal price, and passed from hand to hand. But, if presented for transfer, they were retained in the office of the Company under the pretext of "verification" etc., until the election in view of which the new stock was issued had passed. Of course, for the purposes of the immediately pending election, the voting power was vested in the Director, broker or agent in whose name the stock stood on the books of the Company. Purchasers of the stock certificates, having been precluded from obtaining transfer till after the election, were altogether out of the hunt. The party in control of course voted on the stock thus detained for "verification," and equally of course voted their own re-election. The late Mr. Jas. Fisk Jr. is reported to have said that he could never be turned out of his seat in the Erie Board, so long as he owned a printing press. This is of course an extreme case; but it serves to illustrate the principle that a divorce between the legal ownership of stock and the voting power which is its

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proper incident is an unhealthy symptom in the life and administration of a corporation. If, on the eve of an election, stock which has little or no value (except for speculative purposes) is bought up by the party in control at (say) forty cents or fifty cents on the dollar, it is impossible to resist the conclusion that permanence of control must, for some reason or other, be a very desirable thing to a party which is willing to pay so large a price for the exercise of power. If our enquirer is induced to look up this question and to ascertain for himself why any stock, which does not pay a dividend in the present and has little prospect of doing so in the future, should possess a large marketable value, he may perhaps acquire information which may be of use to him in his future investments. Nor will he fail to note that "controlling parties, who are willing to make considerable sacrifice for the acquisition of stock necessary to maintain them in power, are diligent in the promotion of the system of proxies. The reasonableness or unreasonableness of the proxy system must of course, in the last resort, depend upon the reasonableness or unreasonableness of the delegation of the trust which is involved in voting power. It will not be denied that the exercise of voting power is, in every case, the exercise of a trust. Every trust contains within itself an element of duty and of responsibility. Every improper or rash exercise of a trust affects to a greater or less extent the interests of other persons more or less numerous. It may well and often does happen that the delegation of power by proxy is in every respect legitimate, proper and expedient. For instance, the administration of a given railroad may have been for many years past in every respect trustworthy, efficient and successful. In such a case, the delegation of a controlling

vote by proxy to one or more Directors who are deservedly entitled to the confidence of shareholders is a wise and entirely justifiable step. The trustees of the interests of stockholders have represented those interests to the best of their power, and have earned the confidence of their cestuis que trustent. But, in cases where the history of a railroad has been marked by the unmistakable incidents of speculative control, the proxy system is necessarily fraught with danger.

Our observer will, in the course of his casual enquiries, read some of these proxies, and he may perhaps observe that they affect to pledge the giver of the proxy to something like a power irrevocable within a given number of years, or even irrevocable absolutely. He will (not unnaturally) ask what inducement there can possibly be for the Trustees or practically the servants of the stockholders in a company-to desire comparatively permanent pledges in respect of a tenure of office, which can only be desirable to shareholders so long as it is thoroughly understood by them to be held for their exclusive benefit, and in the prosecution of interests neither directly nor indirectly outside of their own.

CHAPTER X.

FUNDING.

IN his casual survey our observer will note the great number of enterprises which are hopelessly overloaded by the volume and incidents of their fixed indebtedness. The experience of the most successful English railways certainly points to the conclusion that the adjustment of a reasonable or even heavy measure of fixed charges is not an insoluble problem. It does not necessarily cripple the credit or impair the efficiency of a well-managed railway, provided the rate of interest be not unduly burdensome. But he will note that, in many American railroads, while the senior securities receive an extraordinarily high rate of interest, sufficient to take the marrow out of the concern, the junior securities have nevertheless multiplied to an extent quite passing the belief of the ordinary observer. It goes without saying that the holders of prior securities would always welcome a large extension of the interests held by posterior encumbrancers. "But why," he asks, "should junior securities have been heaped up at such an unconscionable pace, and to such an incredible amount, relatively to the value of the undertaking?" The true answer may perhaps be indicated as follows: The trade of America, of which railroads are more or less a barometer, has undergone many grave vicissitudes, which it is unnecessary to specify in detail. To keep a concern going under grievous pressure often needed immediate and

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