COMPANY PROMOTION

Manawatu Standard, Volume LIV, Issue 291, 6 November 1934, Page 8

COMPANY PROMOTION

THE LIMITED LIABILITY PRINCIPLE. ADDRESS BY DR. E. P. NEALE. Particularly interesting in view of the recent publication ol the repoit of the Companies Promotion Commission was an address delivered to members of the Palmerston North branch of the Economic Society last night by Dr. E. P. Neale, D.Sc. ; M.Com., LL.B., secretary of the Auckland Chamber of Commerce, in which he dealt very extensively with the operation of the limited liability P lin ~ ciple in New Zealand and the report ot the Companies Promotion Commission. Introduced by the Mayor (Mr A. EMansford), who presided, Dr. Neale delivered a lengthy address of which the following report furnishes a summary of the main points he elucidated. The speaker traced the conduct of business from the time when the family was the typical economic unit till wider co-operation was recognised as necessary, the great change being the industrial revolution of the 18th century. “The early agencies for carrying on trade and industry were not organised purely for economic purposes, he said. “The economic activities merely helped to strengthen other bonds of unity already ill existence. *V lthm each group the effects of the acquisitive instincts were limited by the fact that individuals in their economic relations were also kinsmen or neighbours In the business enterprises, however, specially constituted for economic purposes (e.g., partnership and joint stock companies), no other interests or ends than the purely economic ones are commonly regarded. From the point of view of productive efficiency three very definite results accrued : —(1) The size of the enterprise could now lie as large or as small as was needed for the most efficient production and was not (as in a family or community unit) sometimes too small and sometimes too large when viewed from the standpoint of maximum productivity at minimum cost; (2) the enterprise could now group men according to their respective capacities for each particular task, not (as in large primitive forms) according to hereditary rank or other non-economic criteria; (3) the enterprise could now without difficulty ignore the aged and other persons unsuited for its purely economic ends.

“Five main types of business organisation may be distinguished. The single enterpreneur system; the partnership system; the joint stock system; the co-operative system where a body of workers provide or borrow the capital necessary to conduct the enterprise, select their own manager, bear the risks of the business, and divide the profit amongst themselves); and the communal system (where the State or some local authority actively engages in enterprise). Under the single entrepreneur system, the owner and manager are one and the same person; the individual carries on the enterprise with his own brains, largely with liis own money, and upon his own responsibility’. This, however, is an age of large-scale enterprise, and the wealth of most individuals is insufficient to provide enough capital for the prosecution of the typical present day business. As a result, the single entreprenuer system tlias, broadly speaking, survived only in certain lines which so far have been found unsuitable for large scale enterprise. Amongst such may be mentioned most types of farming; forms of retail trade; types of manufacture where the necessary capital is small, especially where much depends on direct personal touch between manufacturer and customer, such as baking, tailoring, blacksmithing, etc. “A partnership is the union into one firm of two or more persons (not exceeding ten) all known to each other and, as a rule, all more or less actively participating in the management of the enterprise. As in the case of the single entrepreneur system, the responsibility of management rests on those who have most to gain or lose by the nature of that management. Any member of the partnership has in general the power to bind the firm in all matters within the scope of the partnership. “The disadvantages of the partnership (and particularly the fact that it aoes not lend itself to large scale enterprise) are obviated by the introduction of the joint stock principle. A joint stock company is an association of persons who, by complying with certain requirements of the Companies Act, are granted the privileges of limited liability. In most instances this means that persons who provide capital for the formation of the company (the ‘shareholders’) are liable in the event of the company’s failure, for an amount not exceeding the face value of the shares they have subscribed for. Shares are usually easily transferable from one individual to another, so that an individual can •withdraw his capital from or invest his capital in a joint stock company without the serious difficulties attending such an operation in the case of a partnership.” Dr. Neale commented that, on the whole, there would appear to be a heavy debit balance against the joint stock principle on purely human grounds. “In general, it is unmoved hr generosity or malevolence; ‘it knows no standard but success; it che.rishes no malice; but woe to him that stands in its path; it gravitates towards its goal with the ruthlessness of a lava stream.’

THE INVESTMENT TRUST.

“The investment trust is an agency by which the combined funds of numerous participants are invested in a diversity of securities with the object of attaining safety of principal through distribution of risk,” Dr Neale proceeded. “The portfolio of securities, representing, with cash items, practically the sole assets, is so managed that reasonable current yield is sought on invested capital, at the same time that a continuing supervision of the holdings aims at avoidance of Josses and realisation of profits in any shifting of investments which seems advisable. In the investment and reinvestment of its capital funds, the investment trust has no other object than the creation and maintenance of a sound investment position. Its viewpoint being purely an objective searching for investment values, the investment trust has no ulterier motives of controlling, influencing control, develooing. reorganising, combining, or even sharing in the direction of any enterprises in whose issues Jit any time it may have placed a part of its funds. Mhe investment trust distributes the funds entrusted to it over a wide diversification of holdings, in order that the in'J "berate in proteetn g the portfolio. This distribution of risk among investments owned is (a) generally representative of many types of fcsuere including governments, public utilities, commercial and industrial un dertakmgs; (b) made up of debentures as well as of preferred and common stocks; and (c) generally international.

“The conservative trust will avoid controlling interests, and so shape its investment policies as to evade any directive or managerial responsibilities in connection' with the companies, etc. whose securities it holds. Tlie trust usually endeavours to obtain for its sliare-

holders a return in excess of that ordinarily received on investments of comparable safety, as the result of:— (a) The favourable average interest and dividend yield which a well-manag-ed trust enjoys by reason of the careful selection and purchasing of securities, this return being higher than could be obtained with general safety if the individual investor lacks capital, sufficient for considerable spreading of risk and so to reduce risk invests in gilt edged securities carrying a low rate of return; (b) the balance of cash profits on investment account, which is the result of nxanagerilal alertness; (c) the difference between the cost of capital obtained through issuance of low-coupon debentures, bonds, other forms of borrowing, or preferred shares, and _ the actual earnings made by investing and reinvesting this capital; (d) the consistent accumulation of earning reserves and surplus built np by regularly appropriating thereto a portion of new income; (e) the earnings ° "fclian investment income through such services as underwriting the capital issues of sound new ventures.”

Proceeding Dr. Neale explained that investment trusts can be divided into management or fixed trusts, according to their investment policy The rormer exercise the function of management, by selling securities and reinvesting the proceeds, with a view to improving the security and the earn-ing-power of their holdings. Discretion in management may be limited by provision in tlie articles of association as to the proportions of securities of different types which may be invested in. Such trusts may be general in the sense that they invest in a wide variety of securities, or specialised in the sense that they limit their investments to particular kinds of securities, such as bonds or mortgages, common stocks of public-utility undertakings, shares of financial institutions, and so on. Fixed interest trusts stand in contrast with the other types of trust because in most cases the underlying stocks may not bo materially altered after tlie participating shares have been issued to the public. Continuous management, upon which general investment trusts have been built, is either considerably curtailed or else lacking altogether. “On the whole the economic and social effects of the joint stock principle appear to have been beneficial,” Dr. Neale concluded. “The difficulties of control in the interest of the community are, however, serious; and, as the report of the Companies Promotion Commission points out, legislation is often not sufficiently flexible as an instrument of control or correction, changes are rapid, and the law quickly becomes inadequate, ineffective, and/or unduly restrictive. Indeed, if the law were so designed as to check every possible abuse, it would too often at the same time hamper or prevent much legitimate enterprise to which no'exception should ever be taken. The Commission, therefore, suggests the establishment of a Corporate Investments Bureau to watch tendencies and advise as regards changes in the company law, supervise prospectuses, investigate complaints, demand information, prosecute those committing breaches of the Companies Act (at present this is for the most part _ 110liody’s job), have unsatisfactory directors restrained, and the like.” ~-'l f *-e r a general discussion, in which Mr D O. 'Williams (president of the branch) expressed his pleasure at the address, Dr. was accorded a. vote of appreciation on the motion of Mr A. J. Phillipps.