XIV ETHICS OF CORPORATE MANAGEMENT1 ARTHUR TWINING HADLEY [Arthur Twining Hadley (1856-) has been all his life associated with Yale University, as student, tutor, instructor, professor, and since 1899 as its president. President Hadley's special field of interest has been political science and political economy, particularly the practical questions of railroads and transportation, on which he is regarded as one of the first authorities in the country. For this reason he was appointed by President Taft in 1910 as head of the Railroad Securities Commission. The following address on the Ethics of Corporate Management emphasizes the importance of high moral standards in business relations, an idea which is expressed in many of the author's writings and addresses. This point of view underlies the whole of President Hadley's treatment of the problems of monopoly. These problems, he thinks, cannot be effectively solved either by restrictive legislation or by any of the patent schemes for industrial reform, but only by the cultivation of a wider sense of responsibility and fair dealing on the part of corporations. The Ethics of Corporate Management was one of the Kennedy Lectures for 1906, in the School of Philanthropy, New York. It was first published in the North American, January, 1907, and in the same year included with the other lectures of the series in the author's Standards of Public Morality.] WHEN I go to a responsible store to make a purchase, I have every reason to believe that the price charged will be a fair one. I may not like the goods; I may not feel that I can afford the price; but if I like the goods and can afford the price, I assume that I am not being cheated. The competition of different establishments makes the general scale of charges just; and public sentiment in favor of a one-price system assures me that I shall 1 Reprinted by permission from Standards of Public Morality, by Arthur Twining Hadley (The Macmillan Co.). have the benefit of this general scale of charges in my own particular case. If I go to a bank to borrow money on good security, I have the same feeling. The competition of responsible borrowers on the one hand, and responsible lenders on the other, makes a fair interest rate at which the number of those who can give good security for the management of other people's capital absorbs the offerings of those who are willing to lend their money. Or, if I try to sell my services in any of the recognized lines of industry, I have confidence that both the self-interest and selfrespect of the man with whom I am dealing will lead him to offer me a fair market rate, and that the scale of wages or fees thus created will be more advantageous on the whole than anything which could be devised by law. The man or woman Of course there are numerous exceptions. who hires a cab is by no means certain that the self-respect of the cabman will lead him to believe in a one-price system; and while the competition of different cabs with one another may make a fair enough average rate of compensation, there is great probability that extortion will be practiced in individual instances. Therefore the law steps in to regulate the price of cabs. The man or woman who has occasion to borrow of a pawnbroker has no assurance that the pawnbroker will believe in a one-price system or give the benefit of a market rate of interest. Hence there is a good deal of well-founded demand for usury laws. The only reason why we do not have them is because the advocates of such laws generally object to interest in itself, rather than to extortionate variations from market rates of interest. But the most important cases of departure from the one-price system, and of apparent need of some further protection than is given by competition, do not come in connection with cabs or pawnbrokers or other minor industries of any kind. They come in connection with the dealings of large corporations which obtain a monopoly of the market for some line of goods or services. In his charmingly practical book on Politics, Aristotle tells two stories which are of perennial interest to the student of industrial combination. In the first of these he relates how Thales of Miletus was a great philosopher, but was reproached by his neighbors because he was not as rich as they were. By his acquaintance with astronomy, Thales foresaw that there would be large crops of olives; and he purchased all the olive presses of Miletus, depositing a very small sum in each case so as to make the transaction complete. When the olives were ripe, behold! there was no one but Thales to rent men the presses whereby they might make their oil; and Thales, who was thus able to charge what price he pleased, realized an enormous sum. He did this, says Aristotle, not because he cared for the money, but to show his neighbors that a philosopher can be richer than anybody else if he wants to, and if he is not, it simply proves that he has more worthy objects of contemplation. There was a man in Syracuse, Aristotle goes on to say, in the days of Dionysius the Tyrant, who bought all the iron in Sicily on so narrow a margin that without raising the price very much he was able to make twice the amount of his total investment in a short time. When Dionysius the Tyrant heard of this, he was pleased with the ingenuity of the man; and he told him that he might keep his money, but that he had better leave Syracuse. These stories show plainly enough that monopolies are no new thing; that more than two thousand years ago there was a Standard Oil Company of Asia Minor and a United States Steel Corporation of Sicily; and that the President of the United States is by no means the first monarch who has addressed himself somewhat aggressively to the problem of trust regulation. But in ancient times these monopolies of producers or merchants were an exception; now they are becoming the general rule. The development of the power loom and the spinning machine in the middle of the eighteenth century, followed shortly by that of the steam engine, substituted a system of centralized industry, where a number of people work together, for the scattered industry of the older times, where people worked separately. The invention of the steamship and the railroad enabled the large factories of modern times to send their goods all over the world, and allowed the establishments to increase in size as long as any economy in production was to be gained by such an increase. The capital required for these large industries was far beyond the power of any one man or any small group of partners to furnish. The modern industrial corporation, with free transfer of stock, limited liability of the shareholders, and representative government through a board of directors, was developed as a means of meeting this need for capital. Men who could take no direct part in the management of an industrial enterprise, and whose capital was only a very small fraction of what was needed for the purpose, could, under the system of limited liability, safely associate themselves with a hundred or a thousand others to take the chance of profit which concentration of capital afforded. These industrial units soon became so large that a single one of them was able to supply the whole market. Competition was done away with, and monopoly took its place. This effect was first felt in the case of railroad transportation. You could not generally have the choice between two independent lines of railroad, because business which would furnish a profit to one line was generally quite inadequate to support a second. Nor could you hope for the competition of different owners of locomotives and cars on the same line of track, because of the opportunities for accident and loss to which such a system was exposed. In England, indeed, they were impressed with the analogy of a railroad to a turnpike or canal, and for nearly half a century after the establishment of railroads they made all their laws on the supposition that cars and locomotives would be owned by different people. But the failure of these laws, when so persistently enacted and backed by a conservatism of feeling so strong as that of the English nation, is the best proof of the impracticability of the scheme. By 1850 it became pretty clear that most railroads had a monopoly of their local business. By 1870 the consequences of this monopoly had become quite clearly apparent. These consequences were in some respects good and in some respects bad. The railroad managers were quick to introduce improvements and to effect economy of organization. These improvements allowed them to make rates very low on long-distance business in general, and particularly on business which came into competition with other railroads or with water routes. But the extreme lowness of these through rates only emphasized the glaring inequality between the treatment of the through or competitive business, and the local business of which the railroad had a monopoly. On the old turnpike the cost of transportation had been high, but the shipper could rely upon the price as fair. There was always enough competition between different carriers to prevent them from making extortionate profits on any one shipment. On the railroad which took the place of the turnpike the cost of transportation was very much lower, but there was no assurance whatever of fairness. The local rates were sometimes kept two or three times as high as the through ones; and the shipper had to see carloads of freight hauled to market past his house from more distant points at twenty-five dollars a carload, when he himself was paying fifty dollars a carload for but a part of the same haulage. Nor was this the worst. Arbitrary differences between places were bad enough; but there was a similar discrimination between different persons in the same place. The local freight agent was a sort of almoner of the corporation. The man who gained his ear, whether by honest means or not, got a low rate. The man who failed to get the ear of the freight agent had to pay a much higher rate for the same service. In this country things were at their worst in the years immediately following the Civil War. While we had a one-price system in the trade of the country, both wholesale and retail, and in its banking, and to a large degree in its labor market, the whole system of American railroad rates was run on principles which a decently conducted store would have scorned to admit into its management. Our industrial methods had changed too fast for our ethics to keep pace with them. In the old-fashioned lines of business people were allowed to charge what prices they pleased, because competition kept their power of making mistakes within narrow limits. In the local railroad freight business |