If two classes of stock enjoy exactly equal rights, except that one has a preference as to income and perhaps assets, they do not divide control, but risk, and the combination of con trol plus risk in one, as compared with the combination of control plus risk in the other, makes the ownership represented by one class entirely different from the ownership represented by the other. But the rights may differ, aside from the preference of one as to income and assets or either.
We may speak of these divisions and com binations of income, control, and risk, creat ing different kinds of ownership, as horizontal divisions. With that idea in mind we may make a diagram like this representing a sim ple case: — Now, if we make some further stipulations about this corporation, as that its net earnings are $200,000, that the preferred stock is 6 per cent non-cumulative, and that the bonds are 5 per cent, without any rights of control con tracted for except the right of foreclosure on default of payment of interest or principal, we can make the diagram a little more de finite; — We have not yet mentioned another divis ion of ownership, that represented by the number of shares of stock or the number of bonds. Though in practice corporation financ ing carries this division much further than private financing, the division itself is not peculiar to the corporate form. It appears in the partnership as complete in its nature as in a corporation, and makes a division into amount of ownership rather than kind, — into quantity rather than quality. To carry out the metaphor of a horizontal division as indicat ing a division into kinds of ownership, we may call this division indicating quantity of ownership a perpendicular division.
Further, to carry the metaphor into a dia gram with the same facts as before, we have : — Now, these two kinds of divisions of owner ship accomplish two very different results. The perpendicular division of amounts of ownership makes possible the fitting of every man's pocket-book or financial ability. As already stated, however, this is not peculiar to the corporation. A partnership can accom plish it, and to a limited extent in practice has accomplished it. One of three or more part ners may have one third or one fourth or any other fractional amount of the total owner ship. Nothing in the nature of a partnership prevents this from being carried very far, pos sibly even so far as the quantity divisions of ownership in the United States Steel Corpor ation or the Pennsylvania Railroad, whose security-holders number tens of thousands.
The horizontal division into kinds of owner ship makes possible a more difficult fitting than fitting a man's pocket-book. It makes possible the fitting of his type or state of mind. One man may be more or less willing to take a chance than another. The same man may be more willing at one time than another. He may be unwilling to take any risk whatever without having some control. We saw by the example of the man owning a $5000 farm how difficult it might be, under personal ownership even in a very simple case, to meet a man's state of mind regarding what he wants of the incidents of control, risk, and income.
We cannot consider corporate financing apart from ownership, nor ownership apart from owners. Ownership and owners enter into the consideration as necessarily as the various gases enter into the composition of water. Personal ownership has not developed the ability to fit types and states of mind closely. The fact that corporate ownership has, accounts for a great part, perhaps for the greatest part, of the success of the corporate form of enterprise.
A corporation's stock regularly carries the largest share of actual present control and also regularly the largest share of risk. Organ izers of a corporation may contract out to holders of other classes of securities some of the control exercised by the stock, and to that extent place control with the other class of se curities. For example, a corporate agreement may stipulate that the corporation shall not extend its plant until earnings equal at least twice the interest on its first mortgage bonds. Such a stipulation cuts of very material power, or part of control, from the stock and places it with the bonds. If made at the time of organization the stock never possesses the power. But the stock may possess the power at the time of organization and later part with it for the sake of gaining some other advantage. The usual gain in parting with an advantage of this kind already pos sessed is the securing of additional capital in the enterprise, which will not come in ex cept on this stipulation, or because of it will come in on sufficiently better terms than otherwise.