REPORT

OF THE

COMMISSIONER OF CORPORATIONS.

DEPARTMENT OF COMMERCE AND LABOR,

BUREAU OF CORPORATIONS,
Washington, January 27, 1909.

SIR: I have the honor to submit herewith the report of the Commissioner of Corporations for the fiscal year ended June 30, 1908. During that year there has been no legislation directly affecting the Bureau.

The total appropriations for the Bureau for that year were $247,720. The appropriations for the present fiscal year (1909) are the same. There has been an increase in the number of employees in the Bureau since its organization, beginning with 64 at the end of the fiscal year 1904, 74 in 1905, 73 in 1906, 97 in 1907, and on June 30, 1908, the force consisted of 131. This increase of force has been found absolutely necessary to carry out the extensive work of investigation devolving upon the Bureau.

LEGAL WORK.

The most important legal work of the Bureau in the last fiscal year was in connection with bill for the amendment of the Sherman law of 1890. The Bureau also rendered assistance in the preparation of certain other bills. A very large amount of work was also done in aiding the Department of Justice in the preparation for trial of cases against the Standard Oil Company and certain of its subsidiary concerns for violations of the antitrust law and for practicing discriminations in railway rates. Work has also been done in cooperation with certain prominent writers on legal topics, whose services have been secured for this purpose, to prepare for publication certain features of the corporation laws of the various States. This work is not yet finished.

ECONOMIC AND STATISTICAL WORK.

(1) On May 5, 1908, a report was published giving the results of the investigation of patents granted to officers or employees of the United States. This was in response to a joint resolution of Congress February 18, 1907.

(2) On August 5, 1907, the Bureau published its third report on the petroleum industry, entitled "Prices and Profits." This report dealt with the results of certain methods of the Standard Oil Company. Previous reports on this company published on May 2, 1906,

67044-C & L 1908-20

305

and May 20, 1907, respectively, had set forth certain business methods of the Standard Oil Company. This third report (Prices and Profits) shows the result of these methods on the consumer as to prices and on the Standard Oil Company as to profits.

(3) The Annual Report of the Commissioner of Corporations for the fiscal year ended June 30, 1907, was published December 9, 1907, and set forth certain conclusions as to the general policy of the Bureau and the work of the Government in connection with the regulation of corporations.

(4) On December 30, 1907, there was published a statement of the Commissioner of Corporations in answer to the allegations of the Standard Oil Company concerning its conviction at Chicago for accepting concessions on shipments over the Chicago and Alton Railroad. This statement discussed the allegations of the Standard in its pamphlet entitled "From the Directors of the Standard Oil Company to its Employees and Stockholders."

(5) On May 4, 1908, was published Part I of the Report on Cotton Exchanges, this part dealing with " Methods of establishing grade differences for future contracts."

(6) On May 29, 1908, was published Part II of the Report on Cotton Exchanges, dealing with " Classification of cotton," and Part III thereof, dealing with "Range of grades deliverable on contract.”

There are now on hand in the Bureau, as current work, investigations on the following subject-matters: Tobacco industry, steel industry, International Harvester Company, lumber industry, cotton exchanges, and water transportation.

At the request of the National Conservation Commission recently appointed by the President, certain of the work of the Bureau already on hand was prepared with special reference to the needs of that commission, and also certain other work has been taken up for that commission, especially that on timber stumpage in the lumber investigation, inland waterways, and a recently initiated inquiry into the developed water powers of the United States.

In the last five years the country has made great progress in the problem of corporate regulation. As a result of the work already done, we are now, I believe, in a position to make a further and very definite advance in our general policy.

Three considerations should guide that advance:

(1) That the real issue is, What are the intent, methods, and effect of a given combination or corporation? What a great corporation does and how it does it is of far more practical importance than the mere question whether it is legally a combination or not.

(2) That the first step in such an advance must be to establish a broad system of corporate publicity through a federal office.

(3) That the system adopted shall provide, as far as possible, a basis for the conference and cooperation of all interests.

There is an irresistible movement toward concentration in busiWe must definitely recognize this as an inevitable economic law. We must also recognize the fact that industrial concentration is already largely accomplished, in spite of general statutory prohibition.

Recognizing these facts, the aim of new legislation should be to regulate, rather than to prohibit, combination. It is an obvious ab

surdity to attempt to do both at the same time, and prohibition has practically failed. Our present law, forbidding all combination, therefore needs adaptation to the actual facts. It is now inflexible and indiscriminate. It takes no account of the intent, methods, and results of combination. It often operates against concerns which are morally and economically beneficial, while its defects admit of its easy evasion by corporations whose purposes and results are largely indefensible. În prohibiting combination agreements it has gone far to drive corporations directly to the most extreme and complete form of consolidation. In short, as a practical scheme for the handling of the present corporation problem the sweeping prohibition of the antitrust laws has been altogether unsatisfactory.

If we are to do anything effective with the corporation question, we must make an advance on our present legislation. The practical object is to see that business opportunity and the highways of commerce are kept equally open to all; to prevent fraud, special privilege, and unfair competition.

To do this we must recognize concentration, supervise it, and regulate it. We must do this positively, through an active federal agency, and not merely by the negative prohibitions of penal law. We must have cooperation with corporate interests as far as possible. We must have, of course, effective penal laws against specific forms of unfair competition, and the misuse of monopoly powers.

Above all, we must have a system of efficient publicity. This is the strongest means for our purpose.

"Efficient publicity" means that sort of publicity which reaches the average citizen under everyday conditions. The mere publication of large columns of facts and great masses of figures is not enough. The average citizen will not use such material. A permanent office, after collecting such material, must also summarize it for the public in brief, clear, and reliable conclusions, showing important permanent corporate tendencies.

The Bureau of Corporations has been working on this line for five years. Its experience has shown what such publicity will do. When the great system of secret and semi-secret railway discriminations enjoyed by the Standard Oil Company was made public by the Bureau in 1906, the railroads concerned therein at once voluntarily canceled every rate thus criticised as illegal. Again and again the mere exposure of improper business methods has led to their abandonment without any further action.

But now the work of the Bureau of Corporations is necessarily restricted to a comparatively small scope. The control by the Federal Government should be broadened into a general constructive system based on these tested principles of supervision, publicity, and cooperation.

The details of such a system can be the subject of much difference of opinion, but its main features should be as follows:

(1) It should be operated by the Federal Government. The United States is the only power competent to carry out such a plan of regulation. Corporate business has become national; its regulation must also be national. No considerable number of States can agree on any one system. No one State alone can make its own system effective.

(2) It should provide for a system of regular reports from the large interstate corporations. These reports should be made to an office of the Government. They should set forth the financial condition, business organization, and corporate transactions of the company.

(3) Such government office should have access at all reasonable times to the records and accounts of such corporations.

(4) That office should publish concisely the important facts and tendencies thus disclosed, so far as the same are of public interest. It should safeguard, at the same time, from publication all proper business secrets.

(5) Corporations complying with these requirements should be given the advantage of a definite federal registration, thus reaping the benefit of a public standing as concerns with open accounting and not afraid of publicity.

(6) The system should, if possible, be voluntary. It should not be compulsory if a voluntary system can be made effective. It should be of such a character that large corporations in general will prefer to enter into it, thus making the principle of cooperation the primary one rather than one of compulsion.

(7) It should recognize the basic fact above pointed out, that the Government can not at the same time both prohibit and regulate corporate combination; that if it elects to regulate combination, it must logically permit at least a reasonable degree thereof to exist, and recognize in law what has already become an accomplished business fact.

Finally, supervision must be administrative. No other method has the necessary flexibility. Business can not be regulated properly by the slow methods of judicial procedure. The administrative system places the whole great subject in a branch by itself, to be handled by a permanent office organized and trained for that purpose. It makes the control active, positive, and constructive, not leaving it to the bare prohibition of criminal law.

This supervision must, of course, be in accordance with general principles to be established by statute. Certain specific offenses, also, will always have to be met by penal law, such as railway discriminations and other forms of unfair methods. But general corporate publicity will aid in the enforcement of such criminal statutes, and such offenses will thus be made far more unsafe for the offender.

Such a system will give the information necessary to make public opinion intelligent; it will give it the direction necessary to make it effective.

It will prevent wrong beforehand, because the fear of publicity is a strong deterrent upon improper transactions. It will strike at great classes of industrial evils rather than, as now, merely punishing a single case after the evil has been done. Such a system of publicity through a government office would necessitate a greater measure of uniformity and simplicity in the accounts of industrial corporations. The present complexity of accounting is too often a cover for corporate wrong.

Such publicity will be for the direct benefit of the great majority of companies, those which are conducting their business fairly. Public opinion, now disturbed by a knowledge of the unfair and illegal methods of a comparatively few corporate managers, will thus have

the facts as to all large concerns and be able to discriminate between the few evil doers and the great mass of fair and law-abiding companies. Extreme and sweeping attacks on all corporate business will thus be greatly lessened as the misconception of the real facts disappears. Furthermore, a reasonable degree of such public accounting by so-called "industrial" corporations, comparable in principle to present railway accounting, would do much to broaden the legitimate field of conservative investment for the public. It would permit the freer entry of private capital into general and proper industrial development.

Such a system will result in cooperation between the Government and corporate managers. Such supervision and the making and receiving of regular reports will necessitate constant contact and conference between all parties concerned. This is perhaps its greatest advantage. So complex a subject-matter as our immense industrial machinery can not be intelligently adjusted without constant conference by all parties concerned. It is a mere truism to add that human nature is such that the practical results obtained by cooperation will far exceed anything to be accomplished through penal law.

A further advantage is gained if this form of legislation is optional, as only the great corporations, those of national interest, will be affected. It is only as to such large corporations that publicity is required, and only these would have any need for a modification of the present prohibitions of the antitrust law and any considerable motive for registering under such a system.

A compulsory law would bring in a vast number of small concerns, technically indeed engaged in interstate commerce, but only of local character and of no public interest. Under an optional act these would not register, nor would there be any strong public reason for their doing so. This practical result would do away with much of the inconvenience to individuals which would be caused by a general compulsory system, and would relieve the Government of a mass of unnecessary detail.

The time is ready for such an advance in our corporation policy. There has been, mainly from the work of the present administration, a remarkable advance in the attitude of the financial leaders of the country. Many of them frankly recognize that their great commercial powers are largely "affected with a public trust." They give substantial aid to the Government in correcting corporate evils. The Bureau receives frequently their requests inviting its criticism on their business methods. Very few concerns have refused information to the Bureau in its investigations. Most of those called upon have thrown their records open to complete inspection. Some of them have gone to considerable expense in disclosing all possible sources of information. Many corporate managers have found that such cooperation makes for increased public confidence in these companies and their securities. They feel that the giving of reasonable information as to their operations is well repaid by the improved standing thus gained for their companies as concerns with open accounting and equitable methods.

An excellent illustration is in the recent action of the New York Cotton Exchange. The Commissioner of Corporations in a recent report criticised certain methods of that exchange. The exchange at once appointed a special committee expressly instructed to confer