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THE CENTURY MAGAZINE; Published monthly; 50 cents a copy, $5.00 a year in the United States, $5.60 in Canada, and $6.00 in all other countries (postage included). Publication and circulation office, Concord, N. H. Editorial and advertising offices, 353 Fourth Avenue, New York N. Y. Subscriptions may be forwarded to either of the above offices. Pacific Coast office, 327 Van Nuys Building, Los Angeles, California. W. Morgan Shuster, President; Dana H. Ferrin, Secretary; George L. Wheelock, Treasurer: James Abbott, Assistant Treasurer. Board of Trustees: George H. Hasen, Chairman; George C. Fraser; W. Morgan Shuster. The Century Co. and its editors receive manuscripts and art material, submitted for publication, only on the understanding that they shall not be responsible for loss or injury thereto while in their possession or in transit. All material herein published under copyright, 1927, by The Century Co. Title registered in the U. S. Patent Office. Entered as second-class matter August 18, 1920, at the U. S. post-office, Concord, N. H., under the act of March 3, 1879; entered also at the Post Office Department, Ottawa, Canada. Printed in U. S. A.

Vol 113

February 1927

No 4

I

AN INDUSTRIAL DIVORCE

The Separation of Corporate Management from Ownership
A Reply to Professor Ripley

MAURICE HELY HUTCHINSON

N three vigorous articles contributed recently to the "Atlantic Monthly," followed by a concluding article in the "World's Work," Professor William Z. Ripley of the Harvard chair of economics has focused public attention on certain dangerous tendencies in the field of corporate finance. It is the purpose of this reply to show that in shooting at his mark Professor Ripley has injured a number of responsible people who are sincerely doing their best. He has aimed at a crow; he has probably winged it; there can be no doubt that he has made a valuable contribution toward scaring it; but, in the process, he has brought down a flock of American eagles. Professor Ripley's articles were intended to arouse the public to a realization of the dangers of industrial despotism and especially to stir investors to a sense of the responsibilities involved in the ownership of property. They have, in fact, done an injury to the profession of invest

ment banking. Incidentally, they have tended to fan the flame of prejudice against big business; a flame which is ever ready to become a conflagration, which if it did would consume both good and bad together.

This is all the more momentous by reason of the large public that Professor Ripley reaches and of his wide influence. When Professor Ripley says something, or writes something, it makes a far-reaching impression. This impression reaches far beyond those who have read what he has written and analyzed it in their minds. There are scores of intelligent people who have never even read the articles, much less thought deeply about them, and yet are content to carry in the back of their minds a vague impression that they are "wonderful." Such people will even put their commendation into words; and vociferously support it with more words. Among all the phenomena of our acquisitive society, of our energetic pursuit of

Copyright, 1927, by THE CENTURY Co. All rights reserved.

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labor-saving devices, none is more amazing than the lengths to which men will go in avoiding the trouble of independent thinking. If, therefore, the impression which Professor Ripley creates should happen to be incorrect, the disaster is great. He is enabled too, by virtue of his position, to sacrifice perfect propriety, on occasion, to an epigram. He has recounted with telling effect the "secretive antics" and "financial acrobatics" of some of the principal enterprises of the country. This is the proper license of greatness. But it is beyond the reach of lesser folk. And for this reason, persons of lesser authority can hardly hope to make an effective reply. For, in the mouth of authority, such expressions as "hornswoggling" and "skulduggery" are the quintessence of wit, and provoke to riotous merriment; whereas, coming from the pen of obscurity, they would appear as a tiresome exuberance of expression. Is it not in Disraeli's "Endymion" that the worldly-wise old cynic says to the budding politician, "My son, it is always difficult for us to ascertain whether an idea is a correct one or not; but by words we govern men"? And any one with political experience knows that to attempt to answer a happy catchword by means of a reasoned argument is to court disaster at the outset-though perhaps not to merit it.

However, if, as it appears, the real objective of Professor Ripley's attack is the spirit of Prussianism wherever it may make its appearance in industry; the arbitrary attitude of mind which inspired the phrase "the public be damned"; the philosophy which finds, in the mere fact that it

is possible to do a thing, sufficient sanction for the doing of it—if this description accurately defines the Professor's real objective, no one can deny that he has the support of the great majority of thoughtful persons. But such people will be careful to qualify their support with the consideration that, as enterprises become bigger and bigger, so there grows the need for bigger and bigger men to run them. run them. Support will certainly be forthcoming, from the same source, to Professor Ripley's recommendation as to the principal quarter from which we may hope to derive the most effective protection against arbitrariness; namely, by an increased measure of publicity in corporate affairs. Publicity, in principle, is unexceptionable; it is in keeping with the whole trend of modern development in corporate business; though in practice it is subject to qualification, in most individual cases, as to expediency and necessity. A mere mass of irrelevant information is not of itself enlightening. Apart from these qualifications, it would be foolish to deny that arbitrariness is the most dangerous accompaniment of power and that the pitiless light of publicity is the most effective check to it; so that it seems probable that Professor Ripley and his soberest critics would be found to be in accord as to their ultimate purposes; their differences would be limited to the special subjects chosen for attack and to the method of attacking them. Even on this score, it would not be fair to offer criticisms of Professor Ripley's articles without acknowledging that he has, to some extent, "mended his hurdles" in his recent

article in the "World's Work." In this latter article, however, his main suggestion appears to be the interposition of a stockholders' committee between the stockholders and the directors; which suggests, by inference, that the stockholders ought not to trust their board of directors. In this latter article, too, the Professor quotes a good deal from English corporate practice. In this connection, it seems fair to state that the underlying principle of English corporate practice is to trust in experts-crede experto; whereas it is difficult to escape the conclusion that Professor Ripley's inspiration is mistrust of some person or group of persons; and that his method must tend to foment public suspicion of the objects of his mistrust.

In his choice of the field of corporate finance as a battle-field for an attack upon arbitrariness, Professor Ripley's strategy is appropriate, for here industrial despotism can find its most cynical expression. And it is inevitable that if a battle is to take place upon the field of corporate finance, there must be left, at the end of it, some bankers' wigs on the green. What matters is not so much that there are wigs, or that they are bankers' wigs, but that the skulls which they covered were skulls which deserved to be broken. Therefore, it is all the more important that the point of attack should be vulnerable. It seems fair to say that in two out of the three main points of attack which Professor Ripley has selected, namely, the issue of non-voting stock and the scope of corporate reports, he has chosen features which are far from being so vulnerable as they are made to appear; and that he has over

looked certain practical obstacles, certain physical features of the landscape of big business, which have constrained the stream of corporate finance to occupy the channel in which it now flows; in other words, that the first two articles may be said to suggest Huxley's definition of the greatest of scientific tragedies, "an Hypothesis slain by a Fact."

The third article, which discusses the growth and financial structure of public utility holding companies, offers little material (at any rate, to a banker) for a reply. It has been described, perhaps not inaptly, as a "damp squib." There can be no doubt that its strictures on the topheavy capital structure of a few of the recent "mushroom" companies are timely and well deserved. But it takes back with one hand what it has given with the other. It complains of conditions but hastens to assure one that these conditions no longer exist. It objects to certain banking practices but qualifies the objection by the suggestion that these practices are the exception rather than the rule. Perhaps it may be left to Mr. Samuel Insull, aptly described by the Professor as the "dean" of the public utility industry, to reply with the superb pride of the Moor, and with concise justice, "I have done the State some service and they know 't." The real force of Professor Ripley's third article lies in its closing quotation from Lincoln's "house divided" speech: "If we could first know where we are, and whither we are tending, we could better judge what to do, and how to do it." It is an interesting speculation what would have been the issue, if this quotation

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