THE COMPANIES ACTS

March, 1918

Another Government Committee--The Fallacy of imitatingGermany--Prussianising British Commerce--The Inquiry into theCompanies Acts--Will Labour Influence dominate the Report?--IncreasedProduction the Great Need--Will it be met by tightening up theCompanies Acts?--The Dangers of too much Strictness--Some Reformsnecessary--Publicity, Education, Higher Ideals the only LastingSolution--The Importance of Foreign Investments--Industry cannot takeall Risks and no Profits.

Every week--almost every day--brings with it the announcement of somenew committee considering some question that may, or may not, arisenow or when the war is over. Especially in the realm of finance hasthe Government's output of committees been notably prolific oflate. We have had a Committee on Currency, a Committee on BankingAmalgamations, and a Committee appointed, humorously enough, by theMinistry of Reconstruction to consider what measures, if any, shouldbe taken to protect the public interest in connection with the policyof industrial combinations--a policy which the Board of Trade hasbeen sedulously fostering. Now comes a Committee to inquire "whatamendments are expedient in the Companies Acts, 1908-1917, principallyhaving regard to the circumstances arising out of the war, and to thedevelopments likely to arise on its conclusion, and to report to theBoard of Trade and to the Ministry of Reconstruction." It is composedof the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr,Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr FrankGore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, MrR.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps,M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. Thesecretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are somegood names on the Committee. Mr. Gaspard Farrer represents a greatissuing house; Sir Frank Crisp, company lawyers; Sir William Plender,the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir OwenPhilipps, the shipping interest. Nevertheless, one cannot helpshuddering when one considers the dangers that threaten Britishfinance and industry from ill-considered measures which might possiblybe recommended by a Committee influenced by the atmosphere of thepresent outlook on financial and commercial affairs.

One of the interesting features of the present war atmosphere is thefact that, now when we are fighting as hard as we can to defeat allthat is meant by Prussianism a great many of our rulers and publicmen are doing their best to impose Prussianising methods upon thisunfortunate country, merely because it is generally assumed thatPrussian methods have been shown, during the course of the war, tocarry with them a certain amount of efficiency. It is certainly truethat Prussian methods do very well as applied to the Prussians andsubmitted to by other races of Germans. On the other hand, it is atleast open to argument that the British method of freedom, individualinitiative, elasticity and adaptability have produced results, duringthe present war, which have so far been paralleled by no other countryengaged in the contest. Working on interior lines with the assistanceof docile and entirely submissive allies, Germany has certainly donewonderful things in the war, but it by no means follows that theverdict of posterity will not give the palm of achievement to England,who has not only carried out everything that she promised to do beforethe war, but has incidentally and in the course of it created andequipped an Army on a Continental scale, and otherwise done very muchmore for the assistance of her Allies than was contemplated before thewar began.

It is untrue to say that we were unprepared for the war. We weremore than prepared to do all that we promised to do. What we wereunprepared for was finding ourselves required to turn ourselvesinto, not only the greatest naval Power in the world, but one of thegreatest military Powers also. This demand was sprang upon us, and wehave met it with extraordinary success. The whole idea that Germany'sachievement has been such as to warrant any attempt on our part tomodel our institutions on her pattern seems to me to fall to piecesas soon as one looks calmly at the actual results produced by thedifferent systems. Moreover, even if we were to admit that Germany'sachievement in the war has been immeasurably greater than ours, itstill would not follow that we could improve matters here by followingthe German system. It ought not to be necessary to observe that asystem which is good for one nation or individual is not necessarilygood for another. In the simple matter of diet, for instance, a mostscientifically planned diet given to a child who does not happen tolike it will not do that child any good. These things ought to beobvious, but unfortunately in these times, which call for eminentlypractical thought and effort, there is a curious doctrinaire spiritabroad, and the theorist is continually encouraged to imagine how muchbetter things would be if everything were quite different, whereaswhat we want is the application of practical common sense to practicalfacts as they are.
In the realm of finance the freedom and individual initiative andelasticity of our English system have long been the envy of the world.Our banking system, as was shown, on an earlier page, has alwaysworked with much less restriction on the part of legislative andofficial interference than any other, and, with the help of thisfreedom from official control, English bankers and finance houses hadmade London the financial centre of the world before the war. Theattempt of Parliament to control banking by Peel's Act of 1844 wasquietly set aside by the banking machinery through the development ofthe use of cheques, which made the regulations imposed on the noteissue a matter of quite minor importance, except in times of severecrisis, when these regulations could always be set aside by anappeal to the Chancellor of the Exchequer. There was no Governmentinterference in the matter of new issues of securities on the LondonStock Exchange or of the quotations granted to new securities by theCommittee of the Stock Exchange. Now the Companies Acts are to berevised in view of what may be necessary after the war, and thereis only too much reason to fear that mistakes may occur through theimposition of drastic restrictions, which look so easy to work onpaper, but are more than likely to have the actual effect of doingmuch more harm than good.

"Circumstances arising out of the war and developments likely to ariseon its conclusion" give this Committee a roving commission to considerall kinds of things, which may or may not happen, in the light ofwisdom which may be put before it by interested witnesses, and, worsestill, in the light of semi-official pressure to produce a reportwhich will go down well with the House of Commons. Our politicians areat present in a state of extreme servility before the enterprisinggentlemen who are now at the head of what is called the Labour Party.Every one will sympathise with the aspirations of this party in sofar as they aim at bettering the lot of those who do the hard anduninteresting work of the world, and giving them a larger share of theproductions that they help to turn out; but that is not the samething as giving obsequious attention to the views which theirrepresentatives may have concerning the management of financialaffairs, on the subject of which their knowledge is necessarilylimited and their outlook is likely to be, to a certain extent,prejudiced. A recent manifesto put forward by the leaders of the newLabour Party includes in its programme the acquisition by the nationof the means of production--in other words, the expropriation ofprivate capitalists. The Labour people very probably think that bythis simple method they will be able to save the labourer the costof providing capital and the interest which is paid for its use; andpeople who are actuated by this fallacy, which implies that the ratepaid to capital is thinly disguised robbery, inevitably have warpedviews concerning the machinery of finance and the earnings offinanciers. These views, expressed in practical legislation, mighthave the most serious effects not only upon England's financialsupremacy but also on the industrial activity which that financialsupremacy does so much to maintain and foster.

What, after the war, will be the most important need, from thematerial point of view, for the inhabitants of this country? Howeverthe war may end, and whatever may happen between now and the end ofit, there can be only one answer to this question, and that answeris greatly increased production. The war has already diminished ourcapital resources to the extent of the whole amount that we haveraised by borrowing abroad, that is to say, by pledging the productionof our existing capital, and by selling to foreign countries theforeign securities in which our capitalists had invested duringthe previous century. No one knows the extent to which our capitalresources have been impaired by these two processes, but it may beguessed at as somewhere in the neighbourhood of 1500 millions; thatis to say, about 10 per cent. of a liberal estimate of the totalaccumulated property of the country at the beginning of the war. Tothis direct diminution in our capital resources we have to add theimpossibility, which has existed during the war, of maintaining ourfactories and industrial equipment in first-class working order byexpenditure on account of depreciation of plant. On the other sideof the balance-sheet we can put a large amount of new machineryintroduced, which may or may not be useful for industrial purposesafter the war; greatly improved methods of organisation, the effect ofwhich may or may not be spoilt when the war is over by uncomfortablerelations between Capital and Labour; and our loans to Allies andDominions, some of which may have to be written off, and most of whichwill return us no interest for some time to come, or will at first payus interest if we lend our debtors the money to pay it with. What thecountry will need, above all, on the material side, is an abundantrevenue, which can only be produced by vigorous and steady effort inindustry, which, again, can only be forthcoming if the machinery ofcredit and finance is given the fullest possible freedom to provideevery one who wants to engage in industry and increase the output ofthe country with the financial facilities, without which nothing canbe done.

Is it, then, wise at such a time to impose restrictions by a drastictightening up of the Companies Act, upon those who wish by financialactivity, to further the efforts of industries and producers? On thecontrary, it would seem to be a time to give the greatest possiblefreedom to the financial machine so that there shall be the leastpossible delay and difficulty in providing enterprise with theresources that it needs. We can only make good the ravages of war byactivity in production and strict economy in consumption. What we wantto do is to stimulate the people of this country to work as hard asthey can, to produce as much as possible, to consume as little aspossible on unnecessary enjoyment and luxury, and, so, by procuringa big balance of production over consumption, to have the largestpossible volume of available goods for sale to the rest of the world,in order to rebuild our position as a creditor country, which thewar's demands upon us have to some extent impaired.

It is a commonplace that if it had not been for the great mass offoreign securities, which this country held at the beginning of thewar, we could not nearly so easily have financed the enormous amountof food and munitions which we have had to provide for our population,for our armies, and for the population and armies of our Allies. If,instead of holding a mass of easily marketable securities, we had hadto rely, in order to pay for our purchases of foreign goods, on theproductions of our own mines and factories, and on our power to borrowabroad, then we should have had to restrict very greatly the number ofmen we have put into the firing-line so as to keep them at home forproductive work, or, by the enormous amount of our borrowings, weshould have cheapened the value of British credit abroad to a muchgreater extent than has been the case. Our position as a greatcreditor country was an enormously valuable asset, not only during thewar but also before it, both from a financial and industrial point ofview. It gave us control of the foreign exchanges by enabling us, atany time, to turn the balance of trade in our favour by ceasing for atime to lend money abroad, and calling upon foreign countries to payus the interest due from them. The financial connections which itimplied were of the greatest possible assistance to us in enhancingBritish prestige, and so helping our industry and commerce to push thewares that they produced and handled.

Reform of the Companies Acts has often before the war been a more orless burning question. Whenever the public thought that it had beenswindled by the company promoting machinery, it used to write lettersto the newspapers and point out that it was a scandal that the sharksof the City should be allowed to prey upon the ignorant public,and that something ought to be done by Parliament to insure thatinvestments offered to the public should somehow or other be madeabsolutely watertight and safe, while by some unexplained method thepublic would still be somehow able to derive large benefits fromfortunate speculations in enterprises which turned out right. Everyone must admit there have been some black pages in the historyof British company promoting, and that many swindles have beenperpetrated by which the public has lost its money and dishonest andthird-rate promoters have retired with the spoil. The question is,however, what is the remedy for this admitted and glaring evil? Is itto be found by making the Companies Laws so strict that no respectablecitizen would venture to become a director owing to the fear of penalservitude if the company on whose board he sat did not happen to pay adividend, and that no prospectus could be issued except in the case ofa concern which had already stood so severe a test that its earningcapacity was placed beyond doubt? It would certainly be possible bylegislative enactment to make any security that was offered as safe asConsols, and less subject to fluctuation in value. But when this hadbeen done the effect would be very much like the effect upon rabbitsof the recent fixing of their price. No more securities would beoffered.

It is certainly extremely important for the future financial andindustrial development of this country that the machinery of financeand company promotion should be made as clean as possible. What wewant to do is to make everybody see that a great increase in output isrequired, that this great increase in output can only be brought aboutif there is a great increase in the available amount of capital, thatcapital can only be brought into being by being saved, and that it istherefore everybody's business, both for his own sake and that of thecountry, to earn as much as he can and save as much as he can so thatthe country's capital fund can be increased; so that industry, whichwill have many difficult problems to face when the war is over, shallbe as far as possible relieved from any difficulty of finding all thecapital that it needs. To produce these results it is highly necessaryto increase the confidence of the public in the machinery of the StockExchange, in company promotion and all financial issues. Any one whosincerely believes that these results can be produced by tightening upthe Companies Acts is not only entitled but bound to press as hard ashe can for the securing of this object. But is this the right way todo it? There is much to be said at first sight for making more strictthe regulations under which prospectuses have to be issued under theCompanies Acts, demanding a franker statement of the profits in thepast, a fuller statement concerning the prices paid to vendors, andthe prices paid by vendors to sub-vendors, and so forth. Any one whosits down with a pre-war industrial prospectus in his hand can findmany openings for the hand of the reformer. The accounts published bypublic companies might also be made fuller and more informing withadvantage. But even if these obviously beneficial reforms were carriedout, there would always be danger of their evasion. They might tend tothe placing of securities by hole-and-corner methods without the issueof prospectuses at all, and to all the endless devices for dodging thelaw which are so readily provided as soon as any attempt is madeby legislation to go too far ahead of public education and publicfeeling.

This is the real solution of this problem--publicity, the education ofthe public, and a higher ideal among financiers. As long as the publiclikes to speculate and is greedy and ignorant enough to be taken in bythe wiles of the fraudulent promoter, attempts by legislation to checkthis gentleman's enterprise will be defeated by his ingenuity and thepublic's eagerness to be gulled. The ignorance of the public on thesubject of its investments is abysmal, as anybody knows who is broughtinto practical touch with it. Just as the cure for the production ofrotten and fraudulent patent medicines thrust down the public's throatby assiduous advertising is the education of the public concerning thethings of its stomach, so the real cure for financial swindles is theeducation of the public concerning money matters, and its recognitionof the fact that it is impossible to make a fortune in the Citywithout running risks which involve the possible, not to say probable,loss of all the money with which the speculator starts. When oncethe public has learnt to distinguish between a speculation and aninvestment, and has also learnt honesty enough to be able to knowwhether it wants to speculate or invest, it will have gone muchfurther towards checking the activity of the fraudulent promoterthan any measure that can be recommended by the most respectable andindustrious of committees. At the same time, it must be recognisedby those responsible for our finance, that it is their business,and their interest, to keep the City's back premises clean; becauseinsanitary conditions in the back yard raise a stink which fouls the whole City.

In the meantime, if gossip is to be believed, some of the members ofthe Government have the most disquieting intentions concerning thekind of regulations which they wish to impose on the activities of theCity, especially in its financial branch. It is believed that some ofthe bright young gentlemen who now rule us are in favour of Governmentcontrol over the investment of money placed at home, and theprohibition of the issue of foreign securities; and it is evenwhispered that a fantastic scheme for controlling the profits of allindustrial companies, by which anything earned above a certain levelis to be seized for the benefit of the nation, is now a fashionableproject in influential Parliamentary circles. Every one must, ofcourse, admit that a certain amount of control will be necessary forsome time after the war. It may not be possible at once to throw openthe London Money Market to all borrowers, leaving them and it todecide between them who is to be first favoured with a supply of thecapital for which there will be so large a demand when the war isover. Certain industries, those especially on which our export tradedepends, will have to be first served in the matter of the provisionof capital. If it is a choice between the engineering or shipbuildingtrades and a company that wants to start an aeroplane service betweenLondon and Brighton for the idle rich, it would not be reasonable,during the first few months after the war, that the unproductiveproject should be able, by bidding a high price for capital, toforestall the demand of the more useful producer. And with regardto the issue of foreign securities, there is this to be said, thatforeign securities placed in London have the same effect upon foreignexchange as the import into England of goods shipped from any country;that is to say, for the time being they turn the exchange against us.On the other hand, it is a well-known commonplace that imports ofsecurities have to be balanced by exports of goods or services; andas the times when our export trade is most active are those when mostforeign securities are being placed in London, it follows that anyrestrictions placed upon the issue of foreign securities in Londonwill hinder rather than help that recovery in our export trade whichis so essential to the restoration of our position as a creditorcountry.

Moreover, our rulers must remember this, that in War-time, when allthe letters sent abroad are subject to the eye of the Censor, it ispossible to control the export of British funds abroad; but that inpeace time (unless the censorship is to continue), it will not bepossible to check foreign investment by restricting the issuing offoreign securities in London. If people see better rates to beearned abroad and more favourable prospects offered by the priceof securities on foreign Stock Exchanges, they will invest abroad,whether securities are issued in London or not. As for the curioussuggestion that the profits of industrial companies are henceforwardto be limited and the whole balance above a statutory rate to be takenover by the State for the public good, this would be, in effect, thecontinuance on stricter lines of the Excess Profits Duty. As a warmeasure the Excess Profits Duty has much to be said for it at a timewhen the Government, by its inflationary policy, is putting largewindfalls of profit into the hands of most people who have to hold astock of goods and have only to hold them to see them rise in value.The argument that the State should take back a large proportion ofthis artificially produced profit is sound enough; but, if it isreally to be the case that industry is to be asked for the future totake all the risk of enterprise and handover all the profit abovea certain level to the Government, the reply of industry to such aproposition would inevitably be short, emphatic, unprintable, and byno means productive of revenue to the State.