§ 6. Empirical methods of estimating and apportioning the residual share. While management and ownership are thus united in one person or in one family, the attributing of the shares due to the personal labors of the management and to the investment is very imperfectly done. Indeed in a small business no effort is made to do so except in a vague and incidental way. (See Chapter 18, section 10.) The sim ple furniture-maker chose his trade primarily because of the labor-income it would yield—tho the need of tools and some investment in materials enters in some measure into the de cision, as a burden (cost) incident to the trade, keeping some this kind of share is an arithmetic residual, but year in and year out it is as much subject to adjustment by investors' valuations as is any other share. (Of this, more below, under cost of production.) men out, and causing others to drop out when they can not keep up their equipment. But when the capital investment in shop, tools, materials, and stock is considerable, it comes to be estimated by comparison with alternative contractual incomes. A shopkeeper who clears $1000 in the year, seeing that he could sell out for $4000 and lend the sum for 5 per cent, counts "a fair return" on his investment as approxi mately $200 and his services at $800 a year; or having reason to think that he could not get a position working for an employer that would give him more than $700, counts his capital-income as $300, or per cent; or having an offer of a good permanent position at $900, counts that he is making but $100 on his capital, which is but per cent of what some one will pay him for it. Even in this case, either the greater independence of being his own master or the prospect of better business may deter him from making the change. It is well known that many small owner-managers both in handicrafts and in agriculture make no more, or even less, than "hired man's wages." § 7. Utmost possible degree of separation of investment and management. In the case of a growing business (such as that of the furniture-maker, section 3), as the owner-man ager transfers one duty after another to an employee, the wage (or salary) paid becomes a part of the definite costs of the business. If his own labor is freed for more important things his final residuum will be greater. He can, however, transfer one duty after another to others without taking upon himself other tasks. Taking now the case of one who is al ready the owner of an establishment, consider what is the farthest point to which it would be possible to carry this dif ferentiation of ownership (investment) and management. It can go to the point where the only task of management remaining to the owner is the appointment (and removal) of the general manager, all other matters being left to the ap pointee.
§ 8. Corporations and their control. Rarely when there is a single owner does he so completely divest himself of the managing function. But ownership and management are more nearly and more often separated when the organization is that of a stock company, or corporation, the ownership of which is divided among the holders of shares of stock, or cer tificates of membership. Many corporations have been organ ized by the successful single owner (or by partners, or by a family) as a method of enlarging the business, or of selling * The separation of enterprise and management may be seen in this simple type of organization. The enterpriser (a person or group of per sons) selects the manager, who in turn appoints his subordinates. Each person in the organization receives directions from one immediate superior.
all or part of it, when the owner wished to retire, or to reduce his responsibilities with advancing years or with failing health. It is often difficult to find one buyer willing to in vest the capital needed to acquire a large established busi ness, whereas many persons are ready each to put in small sums if there is outlook for good returns. They are especially
attracted either to an established business having reputation ("good will") and a record of yielding good incomes, or to a new business in which the prime movers and investors are men of known ability and success.
Advantage is taken of this fact by active business men, in fair and in unfair ways, and throughout the nineteenth cen tury the corporate organization proved to be best fitted to attract large amounts of capital for the great industrial, mer cantile, and transportation enterprises. Usually these cor porations were organized by and around some one man or group of men, who either actually paid for stock, or issued it to themselves in payment for the promotion of the undertak ing, retaining thus a majority of the voting power for them selves (each share having one vote). One share over half is the utmost needed for "control," and when the holdings are scattered in small amounts among stockholders, a very much smaller proportion is enough—sometimes as little as 5 per cent. The control may give the power to one man to elect himself to be president or general manager with power to fix his own salary and to appoint the other employees, and to control much in the way he could if absolute owner.
The capital-income from the stock he owns may be of slight importance to him compared with the control. There have been many ways in which the control of an industrial or transportation corporation gave opportunities, increasing with the size of the enterprise, for the man in control and his friends, to get large additional incomes. Many of these ways were plainly illegal, others unquestionably unfair, and still others in the debatable border zone of morality. These make up a large part of the so-called "corporation problem." It is not the place here to discuss that; we wish merely to show the nature of the incomes arising under corporate organiza tion.
§ 9. Single investment function of minority stockhold ers. A minority stockholder who practically has no option but to vote for the officers nominated by the group in control, has in investing but one decision to make : whether to risk his capital in that enterprise managed by that group of men. The only corporations that attract large numbers of minority stockholders are such as for a number of years have paid regu lar dividends, have followed a pretty definite, well-understood policy, and have in large measure gained and deserved con fidence. The Pennsylvania and the New York Central may be named as examples among railroads, whereas the New Haven, which up to about 1910 was in the same class, showed how swift and how great may be the losses inflicted upon minority stockholders as a result of a change of policy by those in control.
The minority stockholder, while he may have no voice prac tically in electing the management, nevertheless in his invest ment bears his full share of the risk of financial loss (indeed, he bears even more than his due fractional share of risk). The stockholders collectively make the initial investment, that which bears the main burden of the financial risk (not all, for the other contractual income-receivers are not absolutely secure), and they receive their non-contractual income as a legally residual share after all other outlays have been made.
Thus it appears from the foregoing survey that the pe culiar function of enterprise is investment and ownership. In many cases, perhaps most cases, the enterpriser still to-day exercises also the management function, and thus ob tains an income that is a complex of an investment profit and a labor-income. In other cases, however, the management function is delegated to an employee, the hired manager, in which case the enterprise and the management functions are more clearly distinct because exercised by different persons. It is our task next to study more closely the function of man agement.