THE CORPORATION
THE study that we have thus far made of the various kinds of businesses
would be incomplete did we not briefly outline the different types of
organization by which modern business is conducted. This will naturally
lead us to a discussion of stocks and bonds, which are of great
importance in every big business and of interest to individuals as means
of investment. However, as the subjects are probably outside the
experience of most students, we shall treat them as simply as possible,
letting the chapter stand rather for the information it contains than
for its application to the study of English expression.
Business to-day is carried on in three different ways; viz., by
individuals, by partnerships, and by corporations. The grocer, the
butcher, the baker, or any one man who carries on a business is an
example of the first. If, however, the grocer and the butcher, or the
grocer and the baker, combine their businesses for the good of both,
they form a partnership. When the amount of capital necessary for
carrying on the business becomes so large that the money of many people
is needed, a _corporation_ is formed. The amount of money which any one
individual invests in the company is represented by a certain number of
shares of the _capital stock_ of the company, entitling him to his
portion of the dividends, or interest on the money he has invested.
These shares of the capital stock are transferable and can be bought and
sold like an automobile or a house. Since there is no time limit as to
how long a corporation may do business, a change in the ownership of
part of the stock, or the death of a stockholder, is not accompanied by
the same result as in a partnership, where the death of one of the
partners sometimes breaks up the business. Furthermore, in a partnership
each one of the partners is personally liable for any debts made by any
of the partners in behalf of the business, whereas the personal
possessions of a stockholder in a corporation cannot be held as security
for any debts incurred by the corporation. These are two of the more
important advantages of corporate organization over partnership.
The Finances of a Corporation
It has been estimated that if one were to count money, dollar by dollar,
one dollar every second for eight hours six days a week, it would take
him six weeks to count one million dollars, and over one hundred years
to count a billion dollars. This may help us to appreciate the sums of
money spoken of in the following: In 1914 the market value of the
Commonwealth Edison Company of Chicago was over $83,000,000. The
valuation placed on the properties of the Chicago Railways Company in
1914 exceeded $79,000,000. The Union Pacific Railroad Company had
invested in its properties in 1914 approximately $500,000,000. The
capital obligations of the United States Steel Corporation in 1914 were
over $1,500,000,000. There are hundreds of such organizations in our
country, the investments in which run to and beyond $50,000,000 each. It
must be plain that, except in a very few cases, these vast amounts of
money do not represent the investment of one, or of a few, but of many
persons. In uniting their capital, these persons decrease the cost of
making or distributing the product and so increase their profits.
Stocks
When a large company of this kind is organized, a certain amount of
money is agreed upon to be the capital of the company, and it is
divided into small portions, ordinarily $100 each, called _shares_. The
total of the shares is called the _authorized capital stock_. These
shares are sold, the purchasers of the shares being called
_shareholders_, or _stockholders,_ of the company. The number of shares
a person holds determines what part of the profits he is entitled to.
For example, if a company is organized for 1000 shares of $100 each, or
a capital stock of $100,000, and you owned 100 shares, you would be
entitled to one-tenth of the divided profits of the company. Such
profits of the company, divided proportionately among the stockholders,
constitute the _dividends_.
Often the capital stock is of two kinds, _preferred_ and _common_, as in
the case of the Union Pacific R. R., which has $200,000,000 of
authorized preferred stock and $296,178,700 of authorized common stock.
As the names signify, preferred stock is ordinarily better than common
stock, the dividends on preferred stock being paid before any dividends
are paid on common stock and usually at a stated rate of interest; as,
4, 5, or 6 per cent. In the case of the Union Pacific, this rate is 4
per cent. If the company earns only enough profits to pay the dividends
on the preferred stock, the common gets no dividends. On the other hand,
if the profits are enormous, the common occasionally gets more than the
preferred.
Par and Market Value
The _par value_ of a stock is the face value of one share of stock,
indicated on the face of the certificate. This may be $10 or $50 or
$100, whatever the amount agreed upon for one share when the company is
organized. The amount most commonly used as par is $100. The _market
value_ of the stock, however, need not be this amount, but may be
greater or less, dependent on how successful the company is and what
rate of dividends it pays. If a company's standing is very good and the
dividends are high (over 6 per cent), the stock will probably sell on
the market above par. If the company's finances are in a doubtful
condition and there are evidences that the company will pay small
dividends, if any at all, the market price of the stock will fall below
par. For example, in January, 1914, Union Pacific R. R. common stock
sold for about $158 per share, because the finances of the company were
in good condition and the company had paid 10 per cent dividends
steadily each year since July 1, 1907. If, however, any occasion should
arise to make the public doubt the payment of future dividends at the
same rate, the stock would probably decline. To go to the other extreme,
in the same month Wabash R. R. common stock sold as low as $8½ per
share, although the par is $100. This was because for some years the
company had paid no dividends and was then in the hands of receivers. To
take a middle case in the same month and year, Erie R. R. first
preferred stock sold at about $45 per share, notwithstanding the fact
that since 1907 no dividends had been paid. The reason for this
seemingly high price was that the company had for some time been
reconstructing its property, had gradually increased its business, had
earned a $9,000,000 surplus in 1913, and had a good outlook to a
dividend in the near future.
These are not the only influences that affect the price of stocks. The
old factor of supply and demand has a great influence on price. If, for
example, a financier decides to buy a large "block" of some stock, the
market will almost immediately be affected, and that stock will go up.
One example will suffice. In 1901 E. H. Harriman set out to buy
$155,000,000 worth of Northern Pacific stock in the open market to gain
control of the Northern Pacific railroad. Of course, the market felt the
demand, and the price of the stock rose from a little above par until it
touched $1,000 a share before it started back to normal. When Mr.
Harriman unloaded that same stock in 1906, because he failed to gain
control, the market went down so considerably that he lost $10,000,000
and almost caused a panic.
Often the stocks of a company sell below par because the stock is
watered; that is, the company has issued more stock than there is value
invested in the property. Many of our railroads, for example, were built
on borrowed money--that is, from the proceeds of the sale of bonds--and,
to make the bonds sell more readily, stocks were given away with them.
This, of course, increased the capitalization greatly without increasing
the value. The temptation in forming new companies, especially in mining
schemes and wildcat ventures, is to water the stock heavily by voting a
large block of stock gratis to the organizers. Before one invests in any
of these companies, he should thoroughly investigate them. Sometimes
companies water their stocks when their dividends have become very large
and they wish to bring the rate down to that commonly paid. The Wells
Fargo Express Company did this in 1910, presenting their stockholders
with $16,000,000 worth of new stock without any new investment in the
property.
Bonds
Suppose that A owns a house with a store in it, and in the store he
carries on a grocery business. Suppose that by enlarging his store and
putting in a bigger stock of goods he can make more money. The
improvements will cost $1,000, but he hasn't the money. He goes to B to
ask B to lend him $1,000 for five years, offering B the house as
security. B gives A the $1,000 and in return gets a certain amount of
interest each year and A's mortgage note against the property. This
means that, if at the end of five years A cannot pay the $1,000, B has
the right to sell A's house and collect the money due him.
When a corporation borrows money to extend its properties, plants, or
rights, the transaction is really the same, although the form is
somewhat different. Just as all the capital stock of a corporation is
divided into shares owned by a number of people, so, when the
corporation borrows money, the amount borrowed is divided into smaller
parts of $500 or $1,000 each, called _bonds_, which the corporation
sells through its bankers to people who have idle money to invest. Twice
each year, as stated in the bond, the corporation pays interest on the
borrowed money at the rate, probably, of 4, 4½, 5, or 6 per cent. After
a definite number of years, as stated in the bond, the corporation is
obliged to pay back the amount of money that it borrowed. This is called
_redeeming_ the bonds. To show that it intends to pay back the amount
borrowed at the end of the time stated, or redeem the bonds when they
become due, the corporation puts a mortgage on its real estate,
buildings, machinery, and equipment. When the bonds become due--or
_mature_, as it is called--if the corporation does not pay back the
amount borrowed, the holders of the bonds may take possession of the
company's real estate, buildings, machinery, and equipment on which the
company has placed the mortgage and may sell them to recover the money
they have loaned. Thus, while the stockholders of a corporation have no
assurance that they will ever get their money back or will ever get any
interest on it, the holders of carefully selected bonds are reasonably
sure of getting a certain amount of interest each year and of getting
their money back when the bonds mature. Shares of stock represent the
investment made by the stockholders who own the company, whereas bonds
represent the investment of those who loan money to the company. We can
readily see, then, that the stockholders take the greater risk. For this
reason it is expected that stocks should yield a higher profit than
bonds, and this is usually the case.
The greater portion of the bonds that are issued by corporations run for
long periods--twenty, forty, fifty, and even one hundred years. At
times when money rates are high, corporations that need funds are
reluctant to pay a high rate for so many years, and so they issue _short
time bonds_ to run from two to five years, in the hope that at the end
of the time money rates will be lower and more favorable to their
issuing long time bonds. Many companies, especially industrial
corporations and railroads, have issued obligations to pay, _notes_
running from six months to five years. They are not usually secured by a
mortgage on the property but are merely the company's promise to pay,
the interest and the principal taking precedence over the dividends on
the preferred and the common stocks.
Corporate Organization
Before a corporation can carry on its business, it must obtain a charter
from one of the states of the United States, whose laws it must obey.
The laws of some states are more lenient than those of others, allowing
the corporations more privileges. New Jersey is thus lenient;
consequently we find many large corporations--such as the United States
Steel Corporation, the American Sugar Refining Company, and
others--organized under the laws of New Jersey. After the charter is
granted and the stock bought by the stockholders, the latter have a
meeting, at which they elect a small number of men to be _directors_,
who, as the name signifies, conduct the business of the company for the
stockholders. They choose a president, one or more vice-presidents, a
treasurer, a secretary, and any other officers necessary to carry on the
business under the control of the directors. The term of office of the
directors is usually so fixed that the term of a part of them expires
each year, so that each year the stockholders have an annual meeting at
which they elect new directors or re-elect the old ones whose term has
expired.
The Railroad
Corporations divide themselves into three large groups; viz., railroad
companies, public utility corporations, and industrial corporations. Of
these, the group composed of the largest and most powerful corporations
is the railroad group.
Railroads have two general sources of income, the larger being the
revenue received from operating trains, both freight and passenger; and
the smaller being the return from investments in other companies, from
real estate, and from the rental of lines, terminals, stations, and cars
to other railroads. To carry on the second or smaller part of its
business, the company needs an organization much like any other
business, but to conduct the first part it requires a special
organization. This divides itself into four departments, usually with a
vice-president at the head of each: (1) the traffic department, (2) the
operating department, (3) the finance and accounting department, and (4)
the legal department.
It is the duty of the traffic department to get the business for the
company and adjust all traffic claims. In short, it does everything to
increase the business and the earnings. This department naturally
divides into the freight traffic and passenger traffic departments, with
a superintendent or manager at the head of each.
After the traffic department has solicited the business for the company,
it is the duty of the operating department to render the services
required by the traffic department. The work is done by four large
divisions: (1) the engineering or construction department, whose duty it
is to build the roads over which the company may operate; (2) the
maintenance-of-way department, whose duty it is to see that the roadbed
and rails are kept in good order and repair; (3) the equipment
department, whose duty it is to see that the company is supplied with
proper locomotives and cars and to see that such equipment is kept in
repair; and (4) the transportation department, which has to do with the
operating of the trains.
The financial policy of a railroad is usually in charge of one of the
vice-presidents, who must be a man of experience in financial matters
and who acts with the approval of the directors. The accounting
department is more important than may appear at first sight. Railroads
are now under the supervision and regulation of the government, and one
of the rights that the government has is to examine the books of the
company at any time and to require all companies to submit a monthly
report to the government.
The legal department of a railroad is especially important for two
reasons: (1) In performing its services, the company has business
dealings with a large number of persons, and in the adjustment of claims
against the railroad, expert legal advice is constantly necessary. (2)
The railroad, as stated above, is under the regulation and control of
the state and the national governments, and the enforcement of this
regulation makes the railroad a party to numerous proceedings in the
courts and before the Interstate Commerce Commission. The large
railroads operate in from ten to twenty states. It can thus easily be
seen that the legal department has a great deal more to do than if the
railroad operated under but one political power.
Public Utility Corporations
Public utility corporations supply services without which the people of
to-day could not very well live. They are those supplying water, light,
heat, power, telephones, local transportation, gas, etc. They may
properly be called public necessity corporations. The nature of these
businesses practically gives them a monopoly in their locality; this is
the reason that they have grown so enormously during the last thirty
years. The Commonwealth Edison Company, which supplies a large part of
Chicago with light and power, began in 1887 with a capital of $500,000
and in 1914 its capital obligations had a market value of over
$83,000,000. The American Telephone and Telegraph Company began in 1885
with $12,000,000 of capital stock and in 1914 had practically
$340,000,000. The other public service corporations have kept pace,
according to the growth of the locality they serve. In the depression of
1907 this class of corporation kept steadily increasing the volume of
its business when all others went back a step. Since these corporations
are dependent on the local community for their business, if the
community grows the company must grow, and usually faster than the
community. For this reason the stocks and bonds of these companies are
usually a good investment.
It is a common practice for municipalities to demand a share of the
profits of the company, by way of a fixed sum, a certain percentage of
the gross profits, or a share of the net profits. For example the city
of Chicago receives, from the Commonwealth Edison Company each year 3
per cent of its gross receipts from the sale of current and 10 per cent
of its gross receipts from the rental of conduit space, amounting in
1913 to more than $300,000, quite a considerable sum. The Chicago
Railways Company and the Chicago City Railway Company, the two large
street car companies of Chicago, after deductions for expenses and
charges and 5 per cent on the amount invested are made from the gross
income, pay to the city 55 per cent of the surplus earnings, keeping for
themselves 45 per cent. Whenever these companies pay part of their
earnings to the municipality, they are really under municipal
supervision, and their books and accounts are open to examination by
the city at any time. These companies are called quasi-municipal
corporations.
Industrial Corporations
As the name indicates, industrial corporations are those that carry on
our industries. They are by far the largest class of corporations and
have among their number some very powerful companies, whose assets run
up toward the billions. This class of corporations has not had the
gradual, steady growth of the public utility corporations, but in the
case of the most successful, the growth has been amazing. The Standard
Oil Company for many years prior to its dissolution had paid dividends
on its capital stock of about $100,000,000 at the rate of 40 per cent a
year. The Steel Corporation is said to have produced a thousand
millionaires and is still producing them. This class of corporations has
not been so closely under the supervision of the federal and municipal
authorities as the railroads and public utility corporations, and their
financing has been carried on in a looser fashion than that of the other
two classes. For this reason the securities of these corporations are
not generally regarded as highly as those of the other two. However, the
federal government has taken and is taking steps to regulate these
corporations, and this will tend to bring them eventually to the
standards of the railroad and public utility corporations.
=Exercise 307=
_Oral_
Explain carefully: