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Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

^^3d Ses^fon^^l SENATE COMMITTEE PRINT 



INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



TEMPORARY NATIONAL ECONOMIC 
COMMITTEE 

A STUDY MADE FOR THE TEMPORARY NATIONAL 

ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS, 

THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION 

NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING 

AND DIRECTING A SELECT COMMITTEE TO MAKE A 

FULL AND COMPLETE STUDY AND INVESTIGATION 

WITH RESPECT TO THE CONCENTRATION OF ECONOMIC 

POWER IN, AND FINANCIAL CONTROL OVER, 

PRODUCTION AND DISTRIBUTION 

OF GOODS AND SERVICES 



MONOGRAPH No. 11-14 
BUREAUCRACY AND TRUSTEESHIP 
IN LARGE CORPORATIONS 



Printed for the use of the 
Temporary National Economic Committee 




UNITED STATES 

GOVERNMENT PRINTING OFFICE 

WASHINGTON : 1940 



■npTHWSTF-R!^ UNIVERSITY SCHOOloTLAWDBRRRt 



TEMPORARY NATIONAL ECONOMIC COMMITTEE 

(Created pursuant to Public Res. 113, 75th Cong.) 

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman 

HATTON W. SUMNERS, Representative from Texas, Vice Chairman 

WILLIAM H. KINO, Senator from Utah 

WALLACE H. WHITE, Jr., Senator from Maine 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 

•WENDELL BERQE, Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 

•SUMNER T. PIKE, Commissioner 

Representing the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Chairman 
Representing the Federal Trade Commission 
ISADOR LUBIN, Commissioner of Labor Statistics . 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics lCr> W 
Representing the Department of Labor 1'^-^ '< 

\cr>' 

JOSEPH J. O'CONNELL, JR., Special Assistant to the General Counsel t — •■ " 



•CHARLES L. KADES, Special Assistant to the General Counsel 
Representing the Department of the Treasury 



CO 



Representing the Department of Commerce C ^ i 

LEON HENDERSON, Economic Coordinator C3 * 

DEWEY ANDERSON, Executive Secretary *" 

THEODORE J. KREPS, Economic Adviser 



•Alternates. 



MON'OeBAPH No. 11 

BUREAUCRACY AND TRUSTEESHIP IN LARGE CORPORATIONS 

MARSHALL E. DIMOCK AND HOWARD K. HYDE 

n 

REPRINTED 

BY 

WILLIAM S HEIN & CO INC 

BUFFALO. N. Y. 



968 



ACKNOWLEDGMENT 

This fiionograph was written by 

MARSHALL E. DIMOCK 

Assistant Secretary of Labor 

Department of Labor 

Professor of Public Administration 

University of Chicago (on leave) 

and 

HOWARD K. HYDE 

Research Analyst and Consultant 

Temporary National Economic Committee 

The Temporary National Economic Committee is greatly indebted 
to these authors for their contribution to the literature of the subject 
under review. 

The status of the materials in this volume is precisely the sam^ as that of 
other carefully prepared testimony when given by individual witnesses; it 
is information submitted for Committee deliberation. No matter what the 
official capacity of the witness or author may be, the publication of his 
testimony, report, or monograph by the Committee in no way signifies nor 
implies assent to, or approval of, any of the facts, opinions, or recommenda- 
tions, nor acceptance thereof in whole or in part by the members of the 
Temporary National Economic Committee, individually or collectively. 
Sole and undivided responsibility for every statement in such testimony, 
reports, or monographs rests entirely upon the respective authors. 

(Signed) Joseph C. O'Mahoney, 
Chairman, Temporary National Economic Committee. 

in 



TABLE OF CONTENTS 



Fag* 

Letter of transmittal - - vn 

Preface ix 

PART I 

THE NATURE AND SCOPE OF BIG BUSINESS 

Chapter I. The Development of Giant Corporations 3 

Chapter II. The Diffusion of Ownership 10 

Chapter III. The Separation of Ownership and Control __ 19 

PART II 

CAUSES AND MANIFESTATIONS OF BUREAUCRACY 

Chapter IV. The Characteristics of Bureaucracy.. - 31 

Chapter V. Structural Causes of Bureaucracy 36 

Chapter VI. Personnel Causes of Bureaucracy 44 

PART 111 

MANAGERIAL CORRECTIVES OF BUREAUCRACY 

Chapter VII. Structural Methods _. 71 

Chapter VIII. Personnel Factors 85 

Chapter IX. Comparison and Summary 99 

PART IV 

THE IMPLICATIONS OF TRUSTEESHIP 

CI ia])ter X. The Requirements of Trusteeship 107 

Chai)ter XI. Securing and Enforcing Trusteeship 123 

Chapter XII. Summar}' of Findings and Recommendations 131 

Ir.dex 137 



SCHEDULE OF TABLES AND CHARTS 



TABLES 

Pag* 

1 . Concentration in four ind ustrial categories, 1 933 5 

2. Number of directors and th 'i- holdings of directorships in the 200 

largest nonfinancial and 1 -rgest financial corporations, 1935 6 

3. Eight interest groups and their assets, 1935 8 

4. 144 out of 200 largest companies distributed according to number of 

stockholders 11 

6. Concentration of control through stockholdings of 155 large corpora- 
tions 12 

6. Distribution of 155 large corporations according to the proportion of 

voting stock owned by management, by industrial classes, Decem- 
ber 31, 1935... •- 13 

7. Average percentage stockholdings of management, by asset groups 13 

8. The location of control of 200 large corporations 21 

9. Officer participation on boards of 36 giant corporations 24 

10. Executive heads of 35 giant corporations, 1939 46 

11. Eight most recent Presidents of the United States 48 

12. Executive heads of the 10 departments and 5 other large agencies of 

the Federal Government, December 1939 ., 48 

13. Under sectetaries and assistant secretaries 49 

14. Sixty-two bureau heads 49 

15. Replacement rates of personnel in 20 large industries, 1938 57 

1 6. Replacement of industrial personnel for 1 938 58 

^7. Number and rate of appointments and separations in the Federal 

service for the fiscal years ending June 30, 1937, and June 30, 1938.. 60-61 

8. Replacement rates of Federal service personnel 62 

9. Fluctuation in executive employment in 100 large industrial companies 

and in employment of wage earners in factories, 1928-1932 111 

10. Typical dollar executive compensation of 44 large industrial companies, 

• 1929and 1936 113 

1. Distribution of families and single individuals and of aggregate income 

received, by income level, 1935-36 117 

CHARTS 

1. Concentration, measured by value of products, in manufacturing 

industries, 1935 facing.. 5 

^. Interlocking directorates among 100 large corporations, 1935.. .facing.. 7 

3. Interlocking directorates among 106 large corporations, 1935.facing.. 8 

4. Rigid and flexible prices 16 

5. Monthly wholesale prices for five frequency groups, 1926-38. .facing.. 16 

6. Production and prices of administered and market price commodities. . 17 
7^ Price and production changes during depression and recovery for 10 

major industries 18 

8. Fluctuation in executive compensation, balance available for dividends, 

earnings, and total dividends for 51 large industrial companies: 

1928-36 112 

9. Distribution of income in the United States facing.. 116 

0. Opinions of businessmen on recent legislation 121 

vx 



LETTER OF TRANSMITTAL 



Hon. Joseph C. O'Mahoney, 

Chairman, Temporary National Economic Committee, 

■ Washington, D. G. 

My Dear Senator O'Mahoney: I transmit herewith a mono- 
graph written under the auspices of the Temporary National Economic 
Committee on the subject of Bureaucracy and Trusteeship in Large 
Corporations. 

Beginning with a summary of the available information on diffusion 
of corporate ownership and the separation of ownership and control, 
it plunges into an anatomical study of bureaucracy. In deaHng with 
the structural and personnel problems inherent in size it discusses 
the managerial correctives employed and recommends some that 
might secure and enforce greater trusteeship in business management. 
In particular, it emphasizes the salutary effect of full transparency of 
business operations. 

This study would have been impossible without the generous coop- 
eration of the United States Department of Labor and the consent 
of those in charge of the Public Administration Fund at the University 
of Chicago and the Rockefeller Foundation that a portion of the re- 
sults of a much larger study on corporate administration now being 
made at the University of Chicago be made available to the committee. 

To give full acknowledgment to all of those in business and in 
government who have given of their time and knowledge to the 
preparation and review of various portions of this monograph would 
unreasonably tax the patience of the reader. But it would be defi- 
nitely remiss to omit an expression of gratitude to the reviewers who 
have gone over this document in its entirety: Mr. Archibald R. 
Graustein, formerly president of the International Paper & Power 
Corporation; Dr. Lloyd G. Reynolds, of the economics staff at Johns 
Hopkins University; and Dr. Edward S. Mason, professor of eco- 
nomics, Harvard University, 

Respectfully submitted. 

Theodore J. Kreps, 

Economic Adviser 

August 16, 1940. 



PREFACE 



Much of the material on which this study is based was secured 
during the course of a research which the authors began at the Uni- 
versity of Chicago several years ago. This larger inquiry has not 
been completed nor the results published. 

The University of Chicago study was financed by the Public Ad- 
ministration Fund of that institution, which in turn was assisted by 
the Rockefeller Foundation. The present monograph was not con- 
templated when the original research was planned and the materials 
gathered. Wlien the Temporary National Economic Committee 
learned of the existence of this inquiry, however, they asked for a 
monograph on bureaucracy and trusteeship in large corporations. 
Those responsible for the imiversity research fund kindly acceded to 
the request. 

The University of Chicago study has been concerned with the 
methods which large corporations have found efficacious in dealing 
with the complex problems of organization and personnel with which 
they are beset. Power relationships exist. Bureaucracy is seemingly 
inherent. To what extent can forethought, philosophy, and Yankee 
ingenuity counteract the inflexibilities incident to large size? In 
what respects are the manifestations of and remedies for bureaucracy 
alike in business and in government, and in what ways are they 
different? It is hoped that some of the basic considerations appli- 
cable to both will emerge as a result of the larger study. 

The present monograph, as we have sajd, draws upon only part 
of the materials. In addition to published studies and other written 
data we have made extensive first-hand observations in selected 
corporations. Approximately 30 corporations were so chosen and 
250 executives, high and low, were interviewed. Some were con- 
sulted several times and use was made of the prolonged interview. 
Four representative corporations were chosen for special study. 
The American Telephone & Telegraph Co. was rather intensively 
dealt with, for it presents much, of interest in management policy 
and technique. 

For the most part, the names of corporations and officials will not 
be divulged in the pages which follow, for no good purpose would be 
served in so doing and the authors would not want to quote officials 
by name without their express permission. Quotations are drawn 
from interviews, however, and for this assistance, even though not 
acknowledged in footn'^tes, the authors are grateful. 

Marshall E. Dimock, 
Howard K. Hyde. 
June 15, 1940, 



PART ! 

THE NATURE AND SCOPE OF BIG BUSINESS 



CHAPTER 1 
THE DEVELOPMENT OF GIANT CORPORATIONS 

When large machines superseded the craftsman with his kit of tools, 
the owner of machines became the master of the Nation's industry. 
As the number of stockholders in the modern corporation constantly 
multiplied, however, so that at length no one person owned a large 
percentage of the business, the manager of the concern tended to re- 
place the owner as the wielder of actual power. Professional man- 
agers, owning none or but a small amount of stock themselves — this 
is the pattern of business which has become prevalent today. 

It has always been an assumption of civilized communities that 
with power there goes a corresponding -responsibility. Usually this 
responsibility has to be enforced; and at least the many, if they are 
wise, will attempt to set limits, establish rules, and provide instru- 
ments of coercion, lest the few be tempted to abuse their power. This 
is the history of all government, and it is peculiarly the essence of the 
democratic form of government, whether that government be political 
or industrial. 

\Vlieu business is small the problems of control and management are 
usually simple. The individual who has the money and the market 
also runs the business. Quite a different situation arises, however, 
when one group of people furnishes the capital and another runs the 
business for it. Then, potentially at least, both owners and laborers 
are dispossessed, as earlier the financier gained the ascendancy over 
the craftsman. Under modern conditions existing in the corporate 
form of enterprise we have what has come to be appropriately called 
management control. The owners own, but they find it difficult to 
exercise real authority. The managers do not own, but actually exer- 
cise the power which determines the success or failure of the enterprise. 

The modern semipublic corporation is obviously a trusteeship, a 
legal-administrative relationship in which the owners, theoretically at 
least, entrust the managers with power to carry on the business for 
them so long as their mandate is complied with and the results are 
generally satisfactory. What are the implications of trusteeship, not 
only for the trustees but also for capital, labor, and the public? How, 
if necessary, can accountability be enforced and sanctions imposed? 
What are the consequences of control without ownership for the gov- 
ernment of business and for political democracy itself? A familiar 
problem to the student of the state — not so often explored by students 
of the business order. 

A second consequence of machine technology and corporate finance 
is the very complexity of giant corporations. The vaster they become 
the more difficult are the structural problems of organization, coordi- 
nation, and control, and the human problems of incentive and leader- 
ship. Large corporations, like other large human enterprises, are 
bureaucratic. They tend to live by fixed rules rather than acumen, 



4 CONCENTRATION OF ECONOMIC POWER 

by the meshing of many component parts rather than the quick deci- 
sion of an entrepreneur. Organization grows in importance as size 
increases and trusteeship gains ascendancy. And like other large 
organisms, the larger the modern corporation becomes, the more it 
tends to move slowly, adapt itself with increasing difficulty, be in- 
creasingly concerned with its inner rules and procedures. Hence, it 
stands in danger of losing that flexibility of price adjustment and 
resiliency of managerial outlook which is the most valuable social asset 
of free competition. Can it be prevented? Are there discoverable, 
reliable offsets to the undesirable aspects of bureaucracy? First we 
must know what we mean by bureaucracy and the causes of its 
objectionable manifestations. 

This is obviously the task of the student of institutional structure 
and functioning, the student of government. His job and that of the 
economist are interrelated. If we knew for sure whether bureaucracy 
is inherent in large corporations, how objectionable, if at all, some of 
its manifestations are, and how possible it is to provide correctives, 
then we could act with greater assurance on the questions of enforced 
competition and small versus large units of business enterprise. 

What is the situation today? Fifty years ago approximately half 
of the gainfully employed persons in the United States were* engaged 
in agriculture. Now, however, agriculture claims only about a fifth 
of the gainfully occupied, while industry ^ has become the employer 
of over half this group .^ Industry, moreover, is characterized by its 
predominantly urban location and by a seemingly inherent tendency 
to coalesce into progressively larger units. 

The concept of big business is not new to the American vocabulary. 
In the laljter part of the last century the trusts provided potent political 
issues and the popular fear of bigness found expression in the enact- 
ment of the anti-trust laws. The passage of these laws seemed to 
alleviate in part the current apprehensions without, however, eff'ec- 
tively blocking the growth of great enterprises.^ We need not here 
go into the legal, political, and economic causes of this nonfulfillment 
of apparent intentions ; it will suffice to point out the growth which has 
occurred. 

In 1909 the 200 largest nonfinancial corporations held approximately 
a third of the assets of all such corporations.* By 1930 over half of 
the assets were so owned. In 1933 the physical, assets of the 200 
giants constituted about 60 percent of all those held by nonfinancial 
corporations, about half of the total industrial wealth, or about a 
fifth of the total national wealth. Expressed in monetary terms, these 
few corporations owned physical assets aggregating some 64 billions 
of dollars.* 

It should be noted that the roster of the 200 giants varies from year 
to year. These changes, however, indicate the differences in the 

> Including the census groups of extraction of minerals, manufacturing, and mechanical industries, trans- 
portation and communication, and trade. 

' U. 8. Department of Commerce, Abstract of the Fifteenth Census of the United States (Washington: • 
Government Printing Office. 1933), p. 3n5. 

' In fact, Thurman Arnold argues that the antitrust laws actually assisted in the growth of big business. 
See his Folklore of Capitalism (New Haven: Yale University Press, 1937), ch. IX. 

* Financial and nonfinancial corporations are not strictly comparable. For one thing, the assets of the 
former are constituted largely of claims on the latter. 

> National Resources Committee, The Structure of the American Economy, Part I (Washington: Govern- 
ment Printing Offlce, 1939), pp. 106-107. This report was prepared under the direction of O.C. Means. See 
also: A. A. Berleand G. C. Means, The Modern Corporation and Private Property (New York: Macmillan, 
1932), ch. Ill: the testimony of Wlllard Thorp before the Temporary National Economic Committee, which 
is summarized in the committee's preliminary report on the Investigation of Concentration of Economic 
Power, 76th Cong., 1st sess., 8. Doc. No. 95, 1939, p. 6; and the Twentieth Century Fund's Big Business: 
Its Growth and Its Place (New York: Twentieth Century Fund, J937). 



Chart I. — ^Concentration, Measured by Value of Products, in Manufacturing Inj)Ustries 1935 * 
INDUSTRIES EMPLOYING MORE THAN 100.000 PERSONS 



WTKR VSHICLES 

Wmil) 7ZHICLZ BODIES » PASTS 

HEAT PACKINa 

STEEL WOKES i. ROUI<» HILLS 

ILSCTRICAL HACHINERT, RC. 

fUaiSOAO REPAIR SHOPS, STEAK 

D0OT3 AND saOES 

COOL & HAIR UANUTACTDRES 

CaTOIIIK, raUITS * TEOhTABLKS 

PRIUnna k PDBUSHINO, NsrePAPERS * PERIODICAIS 

BREAD & OTHER BaEERT PR0DI7CT3 

PAPER 

COTTON ilANOTACTURES 

ION'S COITOU OiRldENTS 

IIkCHINERY, NOT EL3EVIKERE CLASSlrlED 

niRNITURS 

KNIT OOOX 

UEN'S CLOTHIMC 

UniBER t TIMBER FRODOCTS 

PRiNTiHo & poBusaiNa. book, iidsic * ;oB 

WOKEN'S CLOTHlm 




INDUSTRIES EMPLOYING 25,000 TO 100,000 PERSONS 



ClOARETTES 

RUBBER TIRES & TUBES • 

TIN CANS k OTHER TINVIAR2 

RATON & ALLIED FROTOCTS 

AQRIUdLtVRAL lUFLEHENTj 

CARPETS k ROOS 

RZnUSERATDRS 

CLASS 

SEIP k BOAT EoiLorra 

STEAN k HOT HATER HEATDia APPARATOS. ETC. 

CI3ARS 

FSIROLEOU REFINING 

nonhrrods uetal allots k prokcts 

<US, IIANniAClDRED 

CHEiaCALS. not ELSEWRERX CLASSiriEO 

HARDWARE, NOT ELSEXEESE CLASSIFIED 

PAIOTS, PICUENTS k TARNISHES 

DOINES, TORBINSS, TRACTORS, ETC. 

FLOnR k OIHER GRAIN-iaLL PHOniCTS 

RADIO APPAHATOS k FSOHOaRAFllS 

TODNDRIES 

STROCTORAL k ORNAMEOTAL KBTAL «ORK 

DRDDOISTS' PREPARATIONS 

nRE«ORK, NOT ElfEIRERE CLASSIFIES 

UAIHER 

HACBm TOOL ACCESSORIES 

ICE, IkNOFACTURES 

OUT PRODDCTS 

ROBBER GOODS, NOT ELSEISESE CLASSIFIID 

POTTERT 

RATON HANCTACnmES 

STOVES, RAjnES k FURDACES 

BOXES, PAPER 

DTEING k FIHISBIin TEXTILES 

BOXES, WOODEN 

MACHINE TOOLS 

CONFECTIONERT 

STAMPED k PRESSED MBTA; PBOWJCXB 

LI9U0R3, MALT 

SlUt UANDFACTVRES 

PAPER GOODS, NOT ELSEHHERI CLASStFIEO 

MACHIXE SHOPS 

nSHlBB lau. PBODOCTS 




■■I LARGEST 4 ENTERPRISES 
H^ LARGEST 8 ENTERPRISES 



■ From National Resources Committee, The Structure of the American Economy, Part I (Washington: Qovemment Printing Office, 
258325— 40— No. 11 (Pace p. 6) 



CONCENTRATION OF EJOONOMIC POWER 



rate of growth among particular corporations and the mortahty of 
the giants. Tliey do not necessarily affect the degree and growth 
of concentration which exists for industry as a whole. It is this 
phase of the problem in which we are primariljr interested. 

The concentration of business into large units has not taken place 
uniformly throughout the economic structure. Some industries have 
a much greater tendency toward bigness than others. For example, 
90 percent of the Nation's railroad mileage is operated by corpora- 
tions on the list of the 200 giants; 80 percent of the electric-power 
production, practically all the telephone and telegraph service and a 
large part of the metropolitan rapid-transit systems may also be so 
classified.^ In the industrial group the picture is spotty. Some in- 
dustries show a high degree of concentration, while others are at the 
opposite extreme. The over-all role of the large corporation in manu- 
facturing may be indicated thus: 

With size measured by employment: One hundred companies employed 20.7 
percent of all the manpower engaged in manufacturing; 

With size measured by value added by manufacturing: One hundred companies 
contributed 24.7 percent of all the value added in manufacturing activity; 

With size measured by value of product: One hundred companies accounted for 
32.4 percent of the value of products reported by all manufacturing plants.' 

An mdication of concentration in particular manufacturing indus- 
tries is given in chart I, which includes data for all census industries 
employing more than 25,000 persons. The degree of concentration 
in four industrial categories is indicated in table I. 

Table I. — Concentration in 4 industrial categories, 19S3 * 



1933 



Proportion of corporate assets in 4 industrial categories controlled 
by largest corporations in these categories 



Total assets 
less taxable 
investments 
(less depre- 
ciation) 



Land, build- 
ings, and 
equipment 
(less depre- 
ciation) 



76 largest manufacturing corporations 

45 largest transportation corporations 

40 largest public utility corporations 

25 largest "other" nonfinancial corporations 



Percent 

40.2 
91.7 
80.4 
14.8 



Percent 



45.fi 
91.6 
81.2 
17.4 



' From National Resources Committee, The Structure of the American Economy, Part I (Washington: 
Government Printing Office, 1939), p. li)6. 

In the field of trade, the 10 mail-order houses, retail chains, and 
department stores which are on. the list of the 200 giants account for 
about- 8 percent of the Nation's retail sales. It is apparent that the 
great bulk of this part of business is carried on by small units. 

There is somewhat more concentration in the financial field. The 30 
largest banks "together hold 34.3 percent of the banking assets of the 
country outside of the Federal Reserve banks while * * * 17 life- 
insurance companies account for over 81.5 percent of the assets of all 
life-insurance companies." ^ 

Several occupational fields are dominated by small enterprise. 
Foremost among these is, of course, agriculture. In 1935 the 
'7,000,000 farm units each engaging the activities of only one to five 
persons accounted for well over half of the total number of producing 

8 It should be noted that these industries fall in the group which is commonly called natural monopolies. 
' National Resources Committee, op. cit., p. 102. 
« Ibid., p. 103. 



6 



CONCENTRATION OF ECONOMIC POWER 



units in the country and together they accounted for 97 percent of the 
persons engaged in agriculture." ' Nonutility services (except for 
some branches such as motion pictures and education), retail trade, 
and construction are characterized by small enteri)rise. For example, 
retail stores with annual sales of less than $30,000 and usually employ- 
ing one or two persons accounted for 30 percent of total retail sales in 
1935. Construction presents a similar picture. 

The general view on concentration in American industry may be 
stated in summary terms: "Altogether, little more than a third of the 
Nation's economic activity is carried on by producing units engaging 
the activity of one to five persons. An almost equal proportion was 
carried on by a few hundred very large administrative units," '" 
• Concentration, however, is carried beyond that attained by the 
formal organization of giant corporations and their majority-controlled 
subsidiaries. Several less formal methods exist whereby the corporate 
giants are loosely bound together in groups of varying size and soli- 
darity. Foremost among these methods are interlocking directorates, 
services of large financial institutions, intercorporate stockholdings, 
and important stock ownership in several corporations by an indi- 
vidual or group of individuals, various trade and general business 
associations, and sometimes a tacit acceptance of noncompetition. 

The existence of interlocking directorships is not conclusive proof 
that the companies involved work in close harmony. Some directors 
in reality have little to say about management, either because they 
are relatively inactive, or because they are members of the minority, 
or, perhaps most common of all, because the officers of the particular 
companies run their enterprises without substantial assistance from 
the boards. Nevertheless, many directors are influential and in any 
case there can be little doubt that interlockings at least contribute 
substantially to the so-called climate of opinion within which policies 
are determined. Moreover, the majority of those who hold the most 
directorships among the largest corporations also have active posi- 
tions in at least one of the companies they serve. It is possible that 
"such men are likely to take a responsible share in the development of 
policy in any corporation in which they hold a responsible position." '^ 

Table II. — Number of directors and their^holdings of directorships in the 20Q largest 
nonfinanciol and 50 largest financial corporations, 1935 ' 





Total 
number 
of direc- 
tors 


Total 
number 
of di- 
rector- 
ships 
. held 


Cumulative number 


Number of directorships held by a single indivurtal 


Directors 


Director- 
ships 


9 


1 

3 

6 

6 

19 

48 

102 

303 

2,234 




24 

42 

36 

95 

192 

306 

606 

2,234 


1 

4 

10 

16 

35 

83 

185 

488 

2,722 


9 


8 


33 


7 


76 


6 


111 


6 


206 


4 ; 


398 


3 


704 


2. . .. 


1,310 


1 


3,644 






Total 


2,722 


3,544 













> From National Resources Committee, The Structure of the American Economy, Part I (Washington: 
Government Printing Office, 1930), p. 168. 

•Ibid., p. 103. 
" Ibid., p. 104. 
" Ibid., p. 168. 



Chart II. — I.vterlocking Directorates Among 100 Large Corporations, 1935 

ARRANGED IN ORDER OF NUMBER OF INTERLOCKS* 



i i • < < != 1, ; ;; lii „ J. . .« » . ifJs U; kl ij ., J,iU til; 

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URECTOR IN COMMON 

DIRECTORS IN COMMON 
IR MORE DIRECTORS IN COMMON 



ENCE IN READING THE CHART. INTERLOCKS ARE 
E. ONCE IN THE UPPER AND ONCE IN THE LOWER 
HALF OF THE CHART 



CONCENTRATION OF ECONOMIC POWER 



CONCENTRATION OF ECONOMIC POWER 7 

Of the 3,544 directorships on the boards of the 200 largest non- 
financial and 50 largest financial corporations in 1935, 400 men held 
approximately a third. The distribution of all of the directorships in 
these corporations is presented in table 11.'^ As might be expected, 
the extent of interlocking varies widely among the big companies. 
Twenty-five of the companies had no interlocks with others on the 
list of 250, but 151, representing nearly three-fourths of the assets, 
interlocked with 3 or more others and 10 interlocked with 26 or more'. 
The 100 companies with the most interlocks are ranked in order in 
chart II. It would be too great a strain on human nature to expect 
that individuals holding more than 1 directorship would refrain from 
carrying the interests of 1 company over into their deliberations on 
the affairs of other corporations. 

Minority stock ownership is another tie that binds the corporate 
^roup together. The minority stock may be held bv an individual 
)r group of individuals, as illustrated by the Rockefeller group of oil 
companies, or it may be held by another corporation: 

[n the case of at least 30 of the 250 large corporations, 10 percent or more [but 
ess than 50 percent] of the voting power derived from stock ownership was held 
iirectly or indirectly by another corporation in the. group or by one of the 9 
inancial or holding companies not included in the list of 250 corporations but 
dearly part of the corporate community. In all but 1 of these cases, corporate 
itockholders were the only stockholders with 10 pefotint or more of the voting 
>ower.'* 

Since 10 to 20 percent of the voting power is commonly spoken of as 
constituting a so-called working control it can readily be seen that 
)verlapping minority holdings significantly contribute to concentra- 
,ion in American industry. 

The services of large financial institutions constitute a third informal 
ie. The influence of the bankers has doubtless often been overesti- 
nated but it cannot help bein^ real. Most of the issuing of new 
ecurities by the largest corporations is handled by a relatively small 
lumber of financial companies. For example; in 1935, 175 of the 
argest 200 nonfinancial companies issued new securities. Since 10 
irms initiated 56 percent of all corporate underwriting," it is probable 
hat the securities of the giants were handled by a correspondingly 
mall number of investment houses. 

Interest on the part of financial companies in the managerial afiFairs 
if other large corporations, however, does not stem only from the 
trocess of floating new securities. The companies are also a significant 
Toup of investors themselves. In 1935, for example, financial institii- 
ions owned about a fourth of all corporate bonds outstanding." In 
ddition, there is a large but unestimated amount of loans and credits 
f a more short-term nature advanced to corporations by financial 
oncerns. These lending and investing companies are interested in 
aanagement and corporate poHcy not only when making the original 
dvances of credit but also when the recipients run into difl&culties 
f repayment. , . 

In corporate reorganizations various protective and other com- 
littees play a key part. The groups which are influential in con- 

" This table presents only the directorships held on the boards of the 250 giants. It does not show tbt 

imerous directorships held by these men on the boards of lesser companies. 

'« Ibid., pp. 158-159. 

'« Ibid., p. 159. 

>' Ibid., pp. 15»-160, citing Twentieth Century Fond, Debts and Recovery (New York: Twentieth 

entury Fund, 1938), p. 287. 

258325 — 40— No. 11 2 



8 



CONCENTRATION OF ECONOMIC POWER 



trolling these committees stand to gain most in the subsequent 
reorganization. After a comprehensive investigation of such com- 
mittees the Securities and Exchange Commission concluded that "l)y 
and large, control over committees has been in the liands of the roan-- 
agement and the bankers * * *. The bankers * * * to a 
great extent^ have been the spokesmen and strategists for the man- 
agement in reorganizations." ^^ 

The suppliers of credit can ill afford not to be concerned with 
corporate policies which can have such an important effect in' estab- 
lishing the quality of an investment. The inevitable result is thus a 
further linking of the nonfinancial giants through the medium of a 
relatively small number of ffnancial corporations. It should be 
pointed out, however, that this linking does not necessarily mean 
that ffnancial institutions control the nonfinancial companies in- 
volved. In the United States the case of a financial corporation being 
under the influence of an industrial group is quite as likely to occur 
as is the reverse. The process of linking does, however, fesult in a 
concentration of industry. Wliether the top .control is by financial 
or nonfinancial institutions need not concern us at the moment. 



Table III. — 8 interest groups and their 'assets, 1936 * 
[Millions of dollars] 





Morpan 
First 
Na- 
tional 


Rooke- 
fcller 


Kuhn, 
Loeb 


Mellon 


Dii- 
Pont 


Chi- 
cago 


Cleve- 
,land 


Boston 


Total 
assets 


Industrials . . 


3,920 
9,678 
4.421 
12, 191 


4,262 



2,351 

. 




9,963 

548 

342 


1,648 
153 
672 
859 


2,232 



396 




858 



2,595. 

813 


1,066 



33H 




425 


740 
554 


14,411 


Rails - 


19, 794 


Banks , 


12, 001 


■Utilities .. 


14, 759 






Total assets 


30, 210 


6,613 


10, 853 


3,332 


2,628 


4,266 


1,404 

7n-r 


1,719 


61, 026 







■ 1 From National Resources Committee, The Structure of the American EconomY,' part I (Washington: 
Oovernment Printing Office, 1939), p. 161. 

Using these, and other criteria of corporate interrelationship, 
Gardiner Means and his associates haye arranged lOG of 250 giants 
into S interest groups which include about 60 percent of the assets 
of all these companies. ^^ The groups and their assets are given in 
table III. A tabular view of the interlocking directorates of the 
corporations in these groups is presented in chart III. 

Two of the classifications indicated here receive their names from 
financial institutions. The Morgan-First National group is so 
designated because much of the interrelation of the corporations which 
ate included is brought about through these two closely identified 
concerns. As a group it contains representatives of most of the major 
industries in the Nation. The Kuhn, Loeb unit is composed primarily 
of railroads whose financing has been handled for many years by this 
firm, 
r Three groups coalesce around particular families. That of Rocke- 
felter includes six oil companies, which are successors to the old 
Standard Oil Co., and one bank. Rockefeller interests have important 
minority holdings in all these oil companies — usually the only sub- 

>• Securities and Exchange Commission, The Work Activiti(?s, Personnel and Functions of Protectlv* 
ind Reorganization Committees, Part T (Washington: Qovernment Printing Offlce, 1937), p. 342. 
" National Resources Committee, op. cit., pp. 100-1G3, 306-317. 



I 



Chart III. — Interlocking DiREctoRATBs Among 106 Large Corporations, 1935 

ABKANQED ACCORDING TO INTEREST QROUPINOS' 



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FOR CONVENIENCE I 



: MORE DIRECTORS IN COMMON, 
t From Natlooal Resoarcea Commlttw, The Stnicturo of the American Economy, Part I ( Wasbington: QoTemment Printing Office, 1930), p. 162A. 



258325 — 10 — No. 11 {Face p. 8) 



B 

tro 
reo 
mi 
ani 
ag< 
gr< 
ag 

CO 

lis 
fiv 
re 

Pf 
th 
vc 

Ul 

as 
cc 



CONCENTRATION OF bC^ONOMIC POWER 9 

stantial stock interest in each case. Together the oil concerns control 
over half the assets of their industry. The Mellon family has a 
number of companies from different types of industries, centering 
largely in and around Pittsburgh, assigned to it. In about half of 
those companies, Mellon interests appear to own a majoi-ity of the 
outstanding stock. Four companies are assigned to the Du Pont 
family, chiefly on the basis of large minority stock holdings. 

The other three groups appear to gain their cohesivencss largely 
because of the location of the companies involved. There is, how- 
ever, a great deal of interrelationship .among the members of the 
particular groups. The corporate clusters are named foi- their 
respective geographical locations — Boston, Chicago, and Cleveland — 
and their rather high concentration of interlocking directorships is 
shown in chart III. 

One further method of intercorjwrate concentration should be 
noted — that of the trade and business associations. In 1937 there 
were over 2,400 national or interstate associations,'^ which were of 
varying significance in the national economy. The national asso- 
ciations of steel comfjanies, manufacturers, bankers, railroads, and 
electric utilities are largely dominated by big corporations and thus 
constitute. an extension of their influence. Some of the associations 
of retailers, on the other hand, are composed primarily of small 
businesses. 

To a large extent these associations exert their influence through 
affecting the climate of opinion within which policies are formed and 
in serving as the spokesmen for their members on public questions. 
One, the United States Chamber of Commerce, speaks for a very 
broad group. Some go further than this. The National Retail 
Trades Association, for example, has conducted a rather complete 
strike-breaking service.'® Others, such as the cement association, 
through various means provide the m.edium for price uniformity. 
Thus, although the methods and effectiveness of the associations vary, 
there can be little doubt that they contribute substantially to con- 
centration of policy formation and determination of methods in 
American industry. 

18 Ibid., p. 163. 

'•Ibid., p. 1G5, citing hearings before a subcommittee of the Committee on Education and Labor (the 
Xa Follette committee), U. S. Senate, 74th Cong., S. Res. 266, part 3, pp. 809 ff. 



CHAPTER II 
THE DIFFUSION OF OWNERSHIP 

Big business is peculiarly dependent upon the corporate form for 
its metamorphosis into the modern giants. This creature of the 
state not only presents its owners with a welcome limit on their 
liability but opens up the way for the phenomenal growth which we 
have noted. The divisibility of ownership which arises from the 
device of stock enables the shares to become market commodities 
within the reach of multitudes. 

With very rare exceptions, the corporate giants have grown faster 
then their original owners were able or willing to furnish the necessary 
capital. Even Henry Ford, it should bd remembered, financed him- 
Wf through a critical period by shipping automobiles to his dealers in 
excess of their orders and billing them for the shipments. • Durant was 
unable ,to keep control of General Motors because of the demands for 
capital beyond his resources.^ Alexander Bell and his associates soon 
lost control of the telephone company, which they founded, because 
they had to enlist outside capital, the suppliers of which demanded 
successive increases in control.^ Thus the process has continued. 
Each substantial expansion typically requires- an additional market 
for securities. Sometimes, of course, profits are large enough to 
finance expansion, at least for a time; or the original backers of the 
enterprise may have sufficient resources to keep it a closely held 
corporation. Characteristically, however, the corporate giants have 
a widely dispersed group of owners; and this is due, in part at least, 
to the lafge amounts of capital which are required. 

In some cases wide dispersion of stock has been actively fostered 
by management.^ The purposes involved have been several: the 
provision of a broad market for subsequent issues of securities, the 
spreading of interest in the particular company to a large number of 
local individuals, and the garining of a relative increase in the control 
powers by management with a minimum of investment. 

It is not surprising that no one investor has the billions of dollars 
which have gone into the capital structure of such giants as the 
American Telephone & Telegraph Co., the Pennsylvania Railroad, or 
the United States Steel Corporation. But one might not suspect the 
extent to which dispersion of . ownership has taken place in these 
companies. In each of these cases the principal individual stock- 
holder has held less than 1 percent of the outstanding stock. 

The more generalized picture may be drawn from two standpoints: 
that of the number of stockholders of given corporations and that of 

' Arthur Pound, The Turning Wheel (NeT» York: Doubleday, Doran & Co., 1934), chs. VIH and XIII. 

' Federal Communications Commission, Investigation of the Telephone Industry in the United States 
(Washington: Government Printing Office, 1939), pp. 83-84. 

• See, for example, the activities of the Bell Telephone Securities Co., Federal Communications Com- 
mission, Investigation of the Telephone Industry In the United States (Washington: Oovernment Printing 
Office, 1939), pp. 14-15. 

10 



OONCENTKATION OF ECX)NOMIC POWER 



11 



the degree of concentration of stocldioldings in the hands of one or a 
few persons. Of the 200 corporate giants which they examined, Berle 
and Means were able to obtain the size of the stockholder lists of 144 
companies. These lists "revealed the fact that oiAj 20, representing 
less than 5 percent of the assets of the 144 companies each had less 
than 5,000 stockholders, while as many as 71 companies had over 
20,000. More than half the assets represented belonged to companies 
with 50,000 stockholders or more." * A classification of these com- 
panies is indicated in table IV. 

Table IV, — 144 out of 200 largest companies distributed according to number of 

stockholders * 



Railroads 



Public 
utilities 



Indus- 
trials 



Total 



Under 5,000. 

5,000 to 19,999 

20,000 to 49,999... 
50,000 to 99,999... 
100,000 to 199,999. 
200,000 to 500,000. 

Total 



38 



69 



144 



> From A. A. Berle and G. C. Means, The Modern Corporation and Private Property (New York: Mac- 
mlllan, 1932), p. 50. 

While such a classification of company stockholders indicates the 
level of public participation which has been reached, it does not 
clearly show the degree to which concentration of ownership has 
ebbed. Berle and Means found that among their list of 200 corpora- 
tions "only 11 percent of the companies and 6 percent of their wealth 
involved control by a group of individuals owning half or more of the 
stock interest outstanding." ^ A more recent study ^ indicates dis- 
persion of ownership of a like magnitude. Using a summary report 
of the Securities and Exchange Commission,^ plus other sources, 
Gordon classified 155 corporations of the Berle and Means selection 
of 200 according to the concentration of stockholdings. Of the 45 
which were excluded, primarily for lack of data, 16 were not listed 
on any exchange and henc^e were probably closely held. The com- 
bined holdings, weighted according to voting power, of all officers, 
directors, and important outside interests are indicated in table V, 
together with the number of companies which fell in the various con- 
centration classifications. This indicates that in approximately half 
"of these companies the combined holdings of all members of the 
management and other important stockholders total only about 5 
percent, while in no more than 15 cases did such total holdings con- 
stitute a majority of the potential votes. If we add the 16 companies 
on which data was not available, we get 31 of 171 giant corporations 
as members of that rather select group which have ' voting majority 
of their stock held by a fairly small num,ber of persons. Since these 
are combined figures, and since in a larg^ proportiqn of the cases the 

* Op. cit., p. 48. 

« Ibid., p. 114. 

« Robert A. Gordon, "Ownership by Management and Control Groups in the Large Corporation", 
Quarterly Journal of Economics, LII (May 1938), pp. 367-400. 

' Securities and Exchange Commission, Official Summary of Holdings of Officers, Directors, and Principal 
Stockholders (Washington: Government Printing Office, 1936). This gives holdings as of December 31, 



12 



CONCENTRATION OF ECONOMIC POWER 



outside stockholders are other corporations,^ it is obvious that the 
holdings of any individual stockholder are considerably less than i& 
here indicated for his particular group. 

It is frequently supposed that the management, inpluding the di- 
rectors, of large corporations own substantial blocks of stock in their 
own companies. Then, even though outside stockholders may be 
widely dispersed, tliey would be protected through the identity of 
their interests with those of the management. To an examination 
of the extent of the holdings of mniiagemcnt we may now turn. 

Table V. — Concentration of control through stockholdings of 156 large corporations * 

Proportion of voting strength 
held by management and 

important outside groups — of^com- 

Continued panies 

35 to 40 percent 6 

40 to 45 percent 5 

45 to 50 percent- 5 

50 percent and over 15 



Proportion of voting strength 

held by management and o}^^^" 

important outside groups: panies 

to 5 percent 73 



5 to 10 percent. 
10 to 15 percent- 
15 to 20 per ceo t- 
20 to 25 percent - 
25 to 30 percent- 
30 to 35 percent- 



13 
11 



Total 155 

Median 5. 40 



' Source: Robert A. Gordon, "Ownership by Manasement and Control Groups in the Largo Corpora- 
tions," Quarterly Journal of Economics, LII (May 1938), p. 381. 

Gordon has classified management holdings in 155 giant companies 
according to industrial and asset groups. Parts of his findings are 
reproduced in tables VI and VII. These tables indicate that stock 
ownership on the part of officers and even of officers and directors 
combined is virtually nonexistent in a large section of our economy. 
In half of Ihe 36 railroads examined, the officers held not more than 
four-hundredths of 1 percent (the median) of the voting power. The 
corresponding percentages for public utilities and industrials are 0.17 
and 1.38, respectively. For all of the 155 companies combined, the 
proportion of voting stock held by the officers was only four-tenths 
of 1 percent. The addition of the holdings of nonofficer directors to 
those of the officers of course increases the percentages, but they still 
remain small. For the railroad group, in half of the cases the officers 
and directors own no more than 0.58 percent; the public-utility and 
industrial groups follow with 1.18 and 3.60 percent, respectively. 
The combined holdings of both officers and directors did not 
total more than 1.74 percent for half of the complete list of 155 
corporations. In each of these business groups and for all of the 
corporations combined, it is thus apparent that in the typical large 
corporation management holdings are comparatively insignificant 
when expressed in relative terms. 

. Among the business giants there does not seem to be a clear-cut 
inverse relationship between the size of particular companies and the 
proportionate stockholdings of management. Table VII demon- 
strates this in a tabular view of 155 companies, showing the stock- 
holdings of management in different asset classifications. There 
appears to be sonie inverse relationship in the industrial classification, 
but it is quite rough, while it is almost complet- ly absent in the railroad 

' "Thore is a marked absence of larpr ■•utslde holdinRS by individuals or families amonj; the railroads and 
utilities; the outside holders are almost always other railroad and utility companies. Such intercorporate 
ownership is also found in the industrial field, but to a much V'ss triarked i-xleiit."— Oordmi, op. cit., p. TAfl. 
For a liMt of intercnrporatc holdinjis of more than 10 pcrc(Mit »inoi>(» (lie lart-'c C(HiM>anies, see National Kc- 
Konrc(^s ('oininiU('o, op. cit., p. KJO. 



OONCETSTRATION OF ECONOMIC POWER 



13 



and public utility fields. Thus throughout the asset scale from 50 
million to 4 billion dollars the holdings of management are on the 
whole relatively small.* 

Table VI. — Distribution of 155 large corporations according to the -proportion of 
voting slock owned by management, by industrial classes, Dec. SI, 1935 ' 





Vuinbcr of companies 


Proportion of stock 
outstanding 


All officers 


Total management (all officers plus 
nonofficer directors) 




Railroads 


Public 
utilities 


Indus- 
trials 


Total 


Railroads 


Public 
utilities 


• Indus- 
trials 


Total 


to 1 percent - 


31 

1 
2 


27 
2 


38 
11 
9 
6 

1 

14 
2 

1 
1 
1 


96 
14 
11 
9 

1 

15 
3 
1 

1 
1 
1 


23 
3 
3 
2 


16 
7 
3 
3 


22 
9 
5 

11 
5 

13 
8 
3 
5 
2 


61 




19 


2 to 3 percent . . .. 


11 




3 


16 






5 






1 


1 
2 


2 
I 


16 




1 


11 


l.") to 20 percent 




3 


20 to 2.') percent 








1 


6 


2.5 to .30 percent 








2 


30 to 35 percent 


1 




X 




1 


35 to 40 percent 








1 


1 












1 




1 






















2 




2 




2 




2 














Total number of 
companies 


36 


35 


84 


155 


36 


35 


84 


156 


Median.. 


.04 


.17 


1.38 


.40 


.58 


1.18 


3.60 


1.74 






Arithmetic mean 


1.47 


3.91 


3.05 


2.88 


3.64 


5.35 


6.40 


6152 



' Source: Robert A. Gordon, "Ownership by Management and Control Groups in the Large Corpora- 
tions," Quarterly Journal of Economics, LII (May 1938), p. 371. Stockholdings are based on Securitiea 
and E.xchange Commission data and weighted in proportion to voting power. 

f 

For a lai'ge section of our economy it seems clear that the following 
generalizations hold: Industrial activity is typically carried on by 
large corporations and among |:hese corporations ownership is widely 
dispersed. 



Table VII. — Average percentage stockholdings of management, by asset groups 



Assets ainit: $1,000,000) 


Number of companies 


Percentage stockholdings of total 
management (unit: 1 percent)' 


Rail- 
roads 


Public 
utilities 


Indus- 
trials 


Railroads 


Public 
utilities 


Industrials 


50 to 100 


2 
11 
9 
8 
6 


2 
9 
10 
10 
3 
1 


17 
45 
13 
6 
3 


6.89(6.89) 
. 82 (7. 28) 
. 52 (2. 23) 
.48(1.03) 
.88(1.48) 


0.85 (0.85) 
1.03 (2.18) 
3. 16 (10. 20) 

.92 (5.86) 
1.74 (L74) 

.07 (0.07) 


3. 27 (6. 19) 


100 to2.'')0 


4. 57 (8. 3f)) 


250to500 


. 2. 00 (2. 51) 


500 to 1,000 ..... 


1.54 (2.63) 


1,000 to 2,000 


2. 71 (2. 71) 


2,000 and over 















..nd Control Groups in the Large Corporation, Quar- 

Total a.ssets are net of depreciation and other oll.set 

>cc. 31, 1935 (or nearest available date) and reported in 



• Robert A. Gordon, Ownership by Managemer;. 
tcrly Journal of Reonomics, LII (May 1938), p. 37 .. 
reserves, as given in eoii.solidated balance sheets fr, '] 
Moody's Inve.stnient Manuals. 

» Pcrcf^ntagt! figures not in parentheses arc mcd' ir noldihgs for companies in each a.sset group. Figures in 
parenthe.ses represent nrithmotic mean hol<lings . ledians are a eragcs of the central 3 or 4 items In each 
group (depending u|K)n whether the number of u as in each group was odd or even). If there were only 
2 or .3 items in a group, ail were averaged to soci./e loth mean and median.' 



' It should be noted, however, that even a m 11 percentage of a billion-dollar corporation Is « vtkther 
sizable sum wlicn related to, say, the average j '-r ai)ita weiiltli of tl^o nation. 



J4 CONCENTRATION OF ECONOMIC POWER 

Results of the processes of concentration of industry and diffusion of 
ownership. — Despite the recentness of its presentation, the theory of 
so-called monopolistic or imperfect competition has been rather 
thoroughly examined.'" The generally accepted conclusions may, 
however, be repeated: 

(1) All businessmen act like monopolists, limited by the extent of 
the control which they have over a particular market. The usual 
assumption is made that economic persons act in a rational manner 
and that. rationality coincides with seeking to maximize profits. 

(2) Most businessmen have an appreciable effect upon a particular 
market and hence have son e - mtrol ovei i*^., though vnde variations 
exist. 

(3) The extent of the individual businessman's control over a 
particular market depends inversely upon the extent and effectiveness 
of competition. 

(4) A monopolist tends to restrict production and raise prices above 
the level that would obtain if there were competition and the same 
level of efficiency on the part of the individual businessmen concerned. 

To these should be added another point. Because of the lack of 
competition, a monopolist tends to respond relatively slowly to 
changed market conditions. This may be an admission of a lack of 
complete rationality in human nature, but it is based upon empirical 
observation. " The monopolistic-competition theorists point out that 
monopolistic tendencies and evidences are graduated rather than 
suddenly becoming evident at the point when monopoly is reached. 
Thus w^ may expect a positive and continuous correlation between 
concentration of business, control over the market, and infrequency in 
price changes. '' 

Since the institution of the market exercises its control functions 
primarily through price, this will serve as a focal point for a brief 
examination of the extent to which administration has supplanted the 
market in its control over economic activity. A businessman and an 
economist maintain that "if common observation and statistics of 
industrial concentration may be trusted, some degree of jurisdiction 
over price by producers is all but universal." '^ 

Gardiner Means distinguishes three factors underlying the extent 
to which administrative controls have supplanted those of the market: 

(1) At each stage the potential market for the particular product tends to 
narrow down * * *. As goods move from raw materials to finished products, 
the geographical market on the whole tends to narrow down. In a similar fashion 
the market for a particular raw material narrows down as it becomes more and 
more fabricated because of the narrowing of alternative functions for which it can 
be used * * *. Because of this narrowing down of the market at successive 
stages both geographically and functionally, it is usually possible for fewer and 
fewer producers to supply any particular market. It takes a million wheat 
farmers to supply the wheat market, a few thousand flour mills to supply the 
flour market, and only a handful of bakers to supply some rural town or small city 
with bread * * *, And as the number of separate enterprises supplying a 
particular market is smaller the administrative control over prices which can be 
exercised by each producer tends to increase * * * 

"» See. for example, Edward O. Chamberlain, Theory of Monopolistic Competition fCambridge, Mass.: 
Harvard University Press, 1933), and Joan Robinson, Economics of Imperfect Competition (London: 
Macmillan, 1933). 

11 This follows naturally from the separation of price determination from the market. When removed 
from the constant hipRling of a competitive market, we may expect prices to change less frequently. This 
does not necessarily mean, however, that the total price change over a period of time will be less if adminis- 
tratively cintrolled. Frequent price changes, such as those for wheat, may take place within a relatively 
small range. • ^ t- j 

n H. S^ Dcnnison and J. K. Qalbraith, Modern Competition and Business Policy (New York: Oxford 
University Press, 1938), p. 33. 



CONCENTRATION OF ECONOMIC POWER 15 

(2) A second factor * * * is the large size of the efficient enterprise in 
many lines of activity * * *. Administrative control over price * * * 
tends to increase wherever efficiency in production requires large enterprises which 
reduce the number of independent producers required to supply the particular 
market. On the whole, this reduction in the number of separate producers appears 
to be a dominant factor in railroading and communication, highly significant in 
manufacturing, of minor significance in agriculture, and of varying significance in 
forestry and mining * * *. 

(3) A third major factor * * ♦ is collusion between separate enterprises 
or the bringing of whole industries under the dominant control of a single indi- 
vidual or group for the very purpose of exercising control over price." 

In relation to this last factor Dennison and Galbraith comment 
that — 

several firms, each doing the same thing, can jointly reap additional returns over 
the pure competitive level of prices and, production. As has sometimes happened 
in the past, they may be stimulated to get together to effect a control, but more 
often there is a tacit acceptance of the situation and a tacit and frequently unrecog- 
nized concurrence in a policy that effects the desired goal.'* 

Price leadership need not arise collusively; it can result merely from 
the knowledge that if one breaks below the existing price level others 
will follow and none of the concerns involved will profit. Thus there 
grows up the business feeling against the price "chiseler" even though 
the chiseler may be the only protection from excessive prices which 
the consumer has. 

A brief examination of som.e price analyses will amply demonstrate 
that a great deal of the control over prices has passed from the market 
to the administrators. Under competition and a free market price, 
behavior should follow at least two general patterns. In the constaut 
bargaining of the market, changes in demand may be expected to 
result in frequent changes in price in order continuously to move the 
supply. In the second place, a rather large drop in demand usually 
wiU result in a large drop in price, at least until a new equilibrium is 
reached in which the number of suppliers has been greatly decreased. 
Converselyy a rise in demand under competitive conditions will result 
in a rise in price, again at least until a new equilibrium is attained. 
The variation among prices in their sensitivity to changes in demand, 
as shown by the frequency of price changes and the extent of price 
change in relation to large changes in demand, will serve as an indica- 
tion of the extent and location of administrative control over prices. 

In a pioneering pamphlet ^^ Gardiner Means related price inflexi- 
bility to the depression. In an analysis of the frequency of price 
changes during the period 1926-33, based on data of the Bureau of 
Labor Statistics, he found two principal types of industrial prices. 
One group changed frequently" with changes in the market, some- 
times every month, which is as often as changes are reflected in the 
Bureau's data. The other group changed infrequently, if at all, over 
an 8-year period. Com.modities whose price changes lie between 
these two frequency groups were relatively few, considering the range 
of frequency involved. A graphic presentation of this price behavior 
is given in chart IV. Since "a producing unit acting alone can operate 
on a basis of administered prices only where it supplies a significant 
proportion of all the particular market or can narrow down the scope 
of the market by emphasis on special brands, trade names, and sim.ilar 

" National Resources Committee, op. cit., pp. 144-4.5. 
" H. S. Dennison and J. K. Galbraith, op. cit., pp. 34-35. 

" Gardiner G. Means, Industrial Prices and Their Relative Inflexibility, U. S. Conrress, S. Doc. No. 13, 
74th Cong., Istseis. (1935). 



16 



CONCENTRATION OF ECONOMIC POWER 



devices for difFerontiating the product of one producer from that of 
another in the minds of buyers," '« it is apparent that concentration 
has taken place with respect to pricing. 

There is, moreover, quite a distinct rehitionship between the degree 
of a(hninistrative control and the magnitude of the total price change 
over a period of time. The variation in the magnitude of drop and 
rise in i)rices for different prices grouped according to frequency of 
change *^ during 192G-33 is shown in chart V. This chart covcu-s the 
period 192G-38 and hence shows the price decline of 1929-33, the 
rise of 1933-37, and the drop of 1937-38. Group A had a price change 

Chart IV — Rigid and Flexible Prices* 

Ji,71TtMS fHOM ai.S.WMOttSAl.E PBlcr INOeX OlSTBieUTCO ACCORDING T.O FBtQUENCV orp«icecHAN6t 




!•> irCMS 192 ITEMS lai ITCMa 

(I> (3) ("i) 

NUMBER OF PRICE CHANCCS,I926-I933 
(I) cuANico AfTHi mArr oriess THAHOHcr tvcKr iomohths. 

CHCC e^enr ♦ moa/ths aurMone than o/fct eviryio noMTHS. 
THA A/voirss rHA/f3 TtMts c</inr't mouths 

ONTHS 



(J) CHAtteeo AT TMg AAT£ 
(1) CUAMtCDAT TMi /tATC t 
("t) CftAMmtO AT TUCRATC 



irstinA, 

tCfIt THAN OMCf £V£Rr I, 
AT I EAST 3 T/Mls rvfAy 



•From Oardincr C. Moans, Iiulustrial Trices and their Relative Inflexibility, U. S. Congress, S. Doc. 
No. 13, p. 2, 74tl» Cong., 1st sess. (1935). 

fi'cqucncy of less than once a year while group E includes commodities 
whose i)rices changed almost every month. The other groups lie 
between these two. Group A may be characterized as administratively 
controlled because of the infrequent changes and group E as market 
controHed. The chart clearly shows that administratively controlled 
prices were held fairly constant during the period, while market con- 
troHed prices, on tiie other hand, respoiu^ed with wide changes in price 
to changes in demand. 

lint price is only one of the possible means of adjusting to changes 
in d(>mand. Such adjustment can also be made through changes in 
product ion. One might suppose that in the case of administratively 
niaiiitaiucd i)ric(;s a Ihictuation hi production took place. Chart VI 
shows I hat this is the case. For the administered-price group tlrt^e 



'• NnlionnI Ucsourocs Conimittcc, oii. cit., p. 110. 

" rri(|ucncy of jirico change serves ns a good Index of administrative control. 



I 



Chart V. — Monthly Wholesale Prices for 5 Frequency Groups 1926-38 * 



19^6-29 • 100 




1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 

' Flbm National Resonrces Committee, The Structure of the American Kconomy, Part I (Washington: Oovemment Printing Office, 1939), p. 147. 

268326 — 40— No. 11 (Face p. 16) 



, . CONCENTRATION OF ECONOMIC POWER 

^" . . _ ,u. ^,^^A,,M r.f nnr. -nrorhicor from that of 



(lcvic( 

anoth 

has ta 

Th( 

of adi 

ova^r : 

rise ii 

chan^ 

p('iio< 

rise o 



NUMBI 

or 

HEM 



100 



8C 



CC 



M 



•Fi 
No. i: 

frcq 

\vli( 

bet' 

con 

con 

pri( 

trol 

to ( 

1 

ill < 

])r(i 

ma 

slu 



M£e x-.-l^- 



;; ^?S:^7^:::^S:'^^cZ^k^^^ «' administrative contro,. 



CONCENTRATION OF ECONOMIC POWER 



17 



was a decline and recovery of production during 1929-35; for the 
market-price group the decUne and recovery was primarily in terms 
of price. Chart VII shows price and production behavior for 10 
major industries during the period 1929-37. Here it is demonstrated 

Chart VI. — Production and Prices of Adminis- 
tered AND Market Price Commodities ' 



120 



100 



80 



60 



1926-1929 =100 





IGROUP A 








(ADMINISTERED PRICE GROUP) 






• ••'* 










PRODUCTION 


^^.^^ PRICE 










'^ 










*, 


/ 


















*. 


: 








*• .• '•.. 


* 








* , *• 


• 


















*. 










• ,* 










•,• 








1 1 1 1 


1 1 1 


1 


1 



» PRODUCTION DATA FOR CENSUS YEARS, 1932 INTERPOLATED 



120 



too 



80 



60 



40 



^^^^ ••**•• 


(MARK 


GROUP E 

ET PRICE GROUP) 
,.•*'***•.. _PROOUCTION 




• ••••• •^^^^^^"^" i^«taM^*B * » • , 


*1. 






^ PRICE 




1 1 1 1 


1 1 1 1 


1 



1925 



1930 



1935 



' From National Resources Committee, The Structure of the American Economy, 
Part I (Wushinglon: Qoveramcnt I'rinting Ofllcc, 1939), p. 148. 

that the adjustment to depression took place largely through variations 
in production of motor vehicles, agricultural implements, cement, and 
iron, and steel, while food products and agricultural commodities were 
adjusted largely through price. 

This brief perusal of price behavior '* should be adequate to demon- 
strate that administrative control over j)rices permeates a rather large 
portion of our economy with substantial eflects on levels of prices 

I' Kornnc.xcellent.ilotailed examination of this subject, see National Resources Conimiltco, on. cit., pp. 



18 



CONCENTRATION OF ECONOMIC POWER 



and production. Two related conclusions which are of significance 
for our present study may then be stated. First, it is apparent that 
for a large section of our economy, market controls no longer operate. 
Thus this protection of the public against excessive prices and pro- 
duction below the social optimum has to a considerable extent dis- 
appeared.^^ Secondly, in those areas where administrators control 
prices there must be an effective sense of responsibility to the public, 
a sense of business trusteeship to insure that the administrative 
control of prices, production, and hence also employment, does not 

Chart VII. — Price and Production Changes During Depression 
AND Recovery for 10 Major Industries^ 



DECLINE 1929-1932 



RECOVERY 1932-1937 




MOTOR 



VEHICLES 


'mMmm 


WMMHH^ 


AGRICULTURAL 








JMPLEMENTS 


WMH^y 


wjmmmm 










CEMENT 


^% 


1 




IRON a STEEL 




H 




mmmm..r i 



AUTO TIRES 



LEATHER 
PRODUCTS 



PETROLEUM 
PRODUCTS 



TEXTILE 
PRODUCTS 



FOOD 
PRODUCTS 



AGRICULTURAL | 
COMMODITIES 



THE DECLINE 1929-52 IS EXPRESSED AS A PERCENT OF 1929 
THE RECOVERY 1932-37 IS EXPRESSED AS A PERCENT OF 1929 



' From National Resources Committee, The Structure of the American Economy, Part I (Washington 
Government Printing Office, 1939), p. 141. 

result in a level of production substantially below what is readily 
attainable and that undue rigidity does not accentuate and prolong 
depressions. If this sense of responsibility to the public and its 
welfare is absent or ineffective, then means must be foimd whereby 
Its effectiveness may be attained. Otherwise America will malinger 
under a standard of living lower than that which it could and should 
have. In other words, we need a maximum of the benefits of con- 
centration and large-scale production with a minimum of its ills. 

,»!!.Pf""'^*'.° ^? Oalbraith maintain that "when the individual producer can influence price, the self- 
h/,, ^'JS Character of competition, by this very process itself, is impaired or eliminated. When price is 
.l^!^!l. tnc control of the producer, as in agriculture generally, it is an objective specification indicating the 
amount which society regards as the optimum to be produced • • ♦. But if the producer has the power 
nri^i r, \l ' -..I'u- " specificatioH is no longer set by society, but by himself. Quite naturally he forms his 
price policy with his own interest lu mind; it is an accident if the social and the individual interest coincide 
mnn«r.Ai» »i'l^''^J'' ,""^ IS individual jurisdiction over prices there is the same incentive as there is under 
^p cU pp 33 34 '"'' socially desirable minimum. "-H. S. Dennison and J. K. Oalbraith. 



CHAPTER III 
THE SEPARATION OF OWNERSHIP AND CONTROL 

Another result of industrial concentration and the diffusion of 
ownership is so important that it deserves special consideration. It is 
the separation of ownership from control. Theoretically, of course, 
the holders of a majority of the voting stock control a corporation. 
But "the assumption that the owners of common or voting stock 
control a company is for the most part a fiction so far as the large 
corporations listed on exchanges are concerned."^ 

Three general types or sources pf -control may be differentiated: 
control by the holders of a majority of the voting stock, control by 
an active minority, and control by management. Control by means 
of a legal device, such as a holding company, may usually be resolved 
into one or the other of the last two types, especially when one con- 
siders the proportionate interest of the dominant group in the securities 
of the bottom company.^ 

We have already seen how rarely an individual or a small group 
owns a majority of the stock of one of the giant corporations.' Unless 
there is a powerful nucleus of some sort, it is practically impossible 
for the hundreds or thousands of scattered holders of a majority of 
the stock of a giant corporation to get together, even by proxy, in 
order to exercise a degree of control. Moreover — 

The individual stockholder does not know the merits of those who contend for 
the control of the directorate; he has little or none of the materials which might 
enable him to judge by results. Earnings may be good or bad because of the 
competence or incompetence of the officers; but they may be good or- bad, also, 
because of the good or bad condition of business in general.* 

Thus the small stockholder is not in a position to act decisively or 
even to know how to act were he in such a position. So loilg as he 
receives satisfactory dividends or at least convincing reasons why 
such returns are not forthcoming, the average stockholder will return 
his proxy certificate to the existing management or the group in con- 
trol, if he sends it to anyone. The control of the scattered majority, 
in those rare cases where it is effective, is cataclysmic rather than 
continuous. The existing dominant group in the typical large cor- 
poration must sin greatly before the judgpient of the majority breaks 
around its head. Thus, within extremely broad limits, which in 
practice are rarely reached, control by a group other than the ma- 
jority stockholders is the typical situation among the corporate 
giants. 

' John C. Baker, Executive Salaries and Bonus Plans CNew York: McGraw-Hill, 1938), p. 2. 

' The extent to which ownership by the control group in the bottom companies of a holding-company 
pyramid may be carried is illustrated by the former Insull colossus. At one time, Insull interests con- 
trolled some of the bottom companies with as little as twbhundredths of 1 percent ownership of the securities 
of these companies. Yet at only one step of the many-tiered pyramid did Insull have less than a majority 
of the voting stock of the holding or operating company next below. See Federal Trade Commission 
Utility Corporations, No. 72-A (1935), p. 160. 

• Supra, pp. 10 0. 

4 E. S. Dennlson and J. E. (Talbraitb, op. dt., p. 68. 

19 



20 CONCENTRATION OF ECONOMIC POWER 

Minority control is much more common than majority control 
among the large companies. It arises where a compact group owns 
a substantial but minority interest which constitutes a majority of 
the stock actually represented at stockholders' meetings, or to which 
the control group can attract a sufficient number of proxies from 
scattered holders to constitute a majority at such meetings. The 
latter rather than the former is the usual means of minority control. 

Once in power a minority group is difficult to dislodge. It has, of 
course, picked a management which is congenial and cooperative. 
Then the proxy machinery, with expenses paid by the company, is 
commonly at its disposal. The proxy committee is in effect chosen 
by the control group and is used as a means of perpetuating itself. 
Naturally, the larger the corporation and the more dispersed the 
stock, the more difficult it is for a noncontrol faction to amass a 
sufficient number of proxy certificates to oust the control group and 
assume command. 

As long as management is cooperative with the minority control 
group, therefore, the minority is relatively secure in its power. When 
however, the minority and the management disagree, a major battle 
may impend in which the management holds a powerful and strategic 
position. In the ensuing struggle for proxies the management may 
deny the use of the proxy machinery to the minority, which is then 
faced with formidable obstacles. The expense of circularizing stock- 
holders with arguments sufficiently convincing to result in their send- 
ing in proxy certificates to the minority is a considerable item when 
stockholders are numbered in thousands. Then there is the natural 
tendency of the stockholders to let well enough alone and to vote for 
the existing management, if they vote at all. Thirdly, there are 
always two sides to the arguments, and to many the side of manage- 
ment may be the more convincing:. 

The implications of a closely fought battle between a minority con- 
trol and the management have never been more dramatically demon- 
strated than in the successful attempt of John D. Rockefeller, Jr., to 
oust the management of the Standard Oil Co. of Indiana in 1929. 
Colonel Stewart, the head of the management, was implicated in the 
oil scandals of the Harding administration and Rockefeller asked him 
to resign. He refused, and the rest of the board stood by him. The 
result was a battle for proxies for the next election of directors, with 
Rockefeller denied the use of the proxy machinery. With his prestige, 
arguments, and a nucleus of about 15 percent of the outstanding stock 
which was held by his interests, Rockefeller was able to oust Colonel 
Stewart." The effort is reported to have cost Rockefeller $300,000.* 

The situation when the management acts successfully against the 
wishes of a large minority stockholder is illustrated in the struggle 
between J. P. Getty and the management of Tide Water Associated 
Oil Co. Getty sought to make the directors more responsive to the 
stockholders.. However, in spite of his apparent control of about 35 
percent of the stock of Tide Water, Getty lost not only the resulting 
proxy battle by a wide margin, but was unable to get the directors of 
the Mission Corporation, which he presumably controlled, to vote the 
corporation's holdings of Tide Water in his favor. In regprd to the 
latter, Getty and his associates held 44K percent of the stock of 

» See Now York Times, various Issues from January 12 to March 8, 1929; and A. A. Berle and Q. O. Means, 
op. clt., pn. 82-84. 
' One oil executive has remarked, "With $300,000, 1 could buy the proxies of any largo corporation In the 



CONCENTRATION OF ECONOMIC POWER 21 

Mission/ which constituted the only significant stockholder interest.^ 
Yet the directors of Mission voted the corporation's 20 percent hold- 
ings of Tide Water in opposition to Getty. Thus not only did Getty 
fail to win his battle with the Tide Water management, but the direc- 
tors of Mission dared to act against his will. It should be noted, how- 
ever, that the personnel of the board of Mission was subsequently 
largely replaced. 

Additional instances of minority-management controversy could 
be cited, but these serve to illustrate the precariousness of the minor- 
ity's control when management is antagonistic. In the great major- 
ity of the cases, however, management and the minority work harmo- 
niously together, sometimes making concessions * but on the whole 
acting as a team. 

The most common form of control among the large corporations may 
be termed management control. When stockholding is sufficiently 
diffuse the position of management becomes almost impregnable. 

Management does not need to own stock; the strategic advantages 
of its location arc quite sufficient. A presumption of worth is in its 
favor and, more concretely, the proxy machinery is at its disposal. 
Management chooses the proxy committee and by making appomt- 
ments from among the members of management assures its own con- 
tinuance. The effectiveness of this machinery is too formidable for 
small stockholders to overcome. The Financial Editor of the Chicago 
Daily News, for example, describes the situation thus: 

Taking industry as a whole, the methods of using proxies gives the average stock- 
holder about as much chance to express an opinion as a Chinaman would have of 
choosing the President of the United States. He can agree or keep stiU. The 
proxy which is sent out lets him vote for the management: if he objects he can come 
to the meeting and register a kick. When he gets there he will be in the mmority. 
The management usually enters the meeting with enough votes to carry any 
measure, regardless of those present. '^ 

Only the cataclysmic uprising of an indignant majority of the 
stockholders is sufficient to overthrow th6 management. And before 
such a crucial stage is reached even a not too astute management will, 
usually have made concessions, sometimes of a quite minor nature, 
which are adequate to prevent the revolt. In business as in politics, 
taking the enemy into camp often works admirably in extending peace 
between groups. 



Table VIII. 


— The location of control of 200 large corporations 






By number 


By wealth 


Management control 




Percent 
44 
21 
23 

5 
6 

1 


Percent 

58 


Legal device . . 


22 


Minority control •_ .._ 


14 


Majority ownership . . _ 


2 


Private ownership 


• 


4 


In bands of receiver 


(') 








Total 


100 


100 







' From Adolph A. Berle, Jr. and Gardiner C. Means, The Modern Corporation and Private Property 
(New York: Macmillan, 1932), p. 94. 
« Negligible. 

' New York Times, May 8, 1936. 

' Securities and Exchange Commission, Official Summary of Holdings of Officers, Directors, and Prin- 
cipal Stockholders, p. 115. 

< See, for example, the rapprochement betwesn the management of Armour & Co. and Mr. F. H; Prince 
after he had demonstrated his obstructional power and Increased his stockholdings; New York Times, De- 
cember 14 and 17, 1933. 

■c Royal Munger in the Chicago Daily. News, January 20 and March 7, 1939. 



22 CONCENTRATION OP ECONOMIC POWER 

111 their study of 200 large corporations, Berle and Means summa- 
rized their findings as to the location of ultimate control of the giants 
as shown in table VIII. Since control through a legal device is usually 
either minority or management control if traced back far enough, 
control by groups owning less than a majority of the stock dominated 
about 88 percent of the companies representing about 94 percent of 
their wealth, and of this portion management control is paramount. 

The relatively helpless position of the dispersed stockholders makes 
it.imperative that those in command of the large corporations consider 
the rights of these disfranchised citizens of the economic community.*^ 
In other words, the dispersion of stock ownership requires, in the 
interests of justice, that the control group act not only in its own 
interests, but also as a trustee for the interests of those who are unable 
to make their demands effective. A 1928 statement by a subsequent 
chairman of Marshall Field and Company and chairman of the board 
of the American Management Association may be appropriately 
repeated. James O. McKinsey commented that the dispersion of 
stock ownership — 

has brought about the situation in which the board of directors acts in a fiduciary 
capacity. If they fully realize their responsibility, this naturally leads them to 
exercise closer supervision over the activities of the business than if they were 
not representing a large group who were not familiar with the activities of t|ie 
business and who were not exercising any responsibility for the management of 
the business other than ^selecting the directors to represent them.?* 

It jnust be recognized, on the other hand, that it is not easy for 
the control group to give consideration to the interests of the scattered 
stockholders. One important reason for this is that their interests 
may be divergent. The concern of management with high salaries 
may result in lower dividends to the stockholders than would other- 
wise be possible. Or again, since those in control of a corporation are 
the first to gain information which will have an effect upon the value 
of the stock, the insiders may be able to buy or sell in such a way as to 
make substantial profits at the expense of those who are induced to 
sell or of new stockholders who are induced to buy without having 
inside information. While section 16 (b) of the Securities and Ex- 
change Act of 1934 is a real obstacle to many such transactions, it does 
not affect a group of nonofficer stockholders who individually own 
less than 10 percent of any equity issue, but wlio together own a more 
substantial interest. Those in command may also be in a position to 
direct purchases, sales, and other transactions into channels which 
will be profitable to individual members of their group. This is 
particularly true if a holding company with several subsidiaries is used 
as the control device. Such practical limitations must be kept in 
mind when speaking of making trusteeship effective. 

The ascendancy oj management.— With, the diffusion of ownership 
which we have noticed in a large sector of our economy, management 
is left with the responsibility for determining policies, including those 
affecting prices, production, and employment, within very broad 
limits and for all practical purposes without effective check from any 
source. When there is a degree of cojicentration of stockholdings, of 
course, the important stockholders may take part in determining 

11 To be sure, trusteeship Is Inherent, and does not arise from the great number of small stockholders, 
but it is emphasized by their helplessness. 

1' James O. McKinsey, Functions of Boards of Directors, Board Committees and 0£Boers, General 
Management Series: No. 82 (New York: American Management Association, 1920), p. 3. , 



CONCENTRATION OF ECONOMIC POWER 23 

broad policy, either through direct informal contact with the manage- 
ment (including the directors) or through choosing directors who will 
adopt the desired lines of act'on. Even here, however, the directors 
need not be responsive to the demands of those who elected them. 
Except in those relatively rare cases where the charter provides for 
removal, the directors are practically unfettered in making their de- 
cisions until reelection time comes. And in the large proportion of 
the corporate giants where management rules supreme, evien election 
time is no cause for particular concern, for the means of returning 
themselves to office are securely in their -own hands. 

What sort of economic empires have been thereby set up? Are 
they monarchies or oligarchies? To what extent is policy formation 
brought to a focus? The rather intensive investigation of a limited 
number of giant corporations and the more cursory view of a larger 
number made by. the authors will permit few generalizations answer- 
ing these questions, although tendencies may be noted. Two general- 
izations, however, may be presented. These are (1) large boards 
rarely function effectively as units,' yet, on the other harid, (2) giant 
corporations actually run by one man are fully as rare. In economic 
as in political empires the contributions of several minds are essential 
to success. 

A common role which the boards of directors of the large corpora- 
tions play is that of serving as ratifying bodies for the decisions of the 
executives. The board members either do not have the time or the 
interest to take a very active part in the formation of managerial 
policy. One student of industrial administration, for example, has 
said: 

I have always found that the only thing boards of directors are interested in 
getting from an operative or production manager is statistics of savings, increased 
profits, lower operating expenses. They are not interested in how it, was done 
or how the worker or others felt about it. They are not interested in plans you 
may have or how the executives are going to continue the process because the 
process has to be continued if the executives' reports are going to be satisfactory. ''^ 

Our study of the management of giant corporations has indicated 
that Diemer may have somewhat overdrawn the picture, but that for 
boards functioning as a unit there is a clear tendency in the direction 
which he indicates. There are, of course, wide variations. Two 
executives of two giant corporations illustrated the extremes of board 
activity in interviews. One said: 

Board meetings are rare and they never do anything important. We hardly 
know that the board exists, and I doubt whether a half dozen employees could 
telJ you who the members are. 

On the other extreme, the second described the activities of the board 
of his company thus: 

Until a short time ago the board met regularly five times a week. It still dis- 
patches much detailed buriness. For example, five possible packages for- 



are put before one of the board members. He picks the one he favors, the board 
concurs, and he orders the president of the proper subsidiary company to go 
ahead with production.^ 

Comments such as "The board serves as a reserved control"; "The 
board can't control; no one except management knows enough about 
the business to ask intelligent questions"; "There are few cases in 
which the board has been asked to determine direction," were common 

u Comments of Hugo Diemer, of the La Salle Extension University, in James O. McKinsey, op. cit., p. 16, 
25S325 40 No. 11 3 



24 



CONCENTRATION OF ECONOMIC POWER 



The typical board as a unit in the large corporation appears to exercise 
little authority of a continuing nature. In roughly three-fourths of 
the companies examined on this point the board had only a small role 
to play. 

In the other corporations where the boards were more active there 
was commonly a heavy sprinlding of members who were officers. In 
these cases the increased activity on the part of the board seemed to 
arise chiefly out of the officer members getting approval for action 
taken or to be taken in their respective departments — matters which 
in other companies were decided without reference to the board. 

The functions of the boards may be related to their composition. 
Of the 20 largest industrials, the 8 largest utilities and the 8 largest 
railroads of Gardiner Means' list of large corporations,^* approximately 
half have boards with more than 1 5 members. There is little variation 
in this median among the groups. The boards range from 4 members 
for Ford to 36 for E. I. du Pont de Nemours. It has long been found 
difficult for such large boards to function as units. ^^ 

An examination of the boards of these companies also shows that 
there is wide variation in officer ^® participation. Some of the com- 
panies had only one officer on the board while in others, the board was 
composed entirely of officers and those closely associated with the 
executives. ^^ The variation for this small group of companies is shown 
in table IX. This indicates that railroads most frequently have non- 
officer boards, utilities follow with nonofficer and mixed boards, while 
there is not a clear emphasis on either officer or nonofficer boards 
among the industrials.^^ 

Table IX. — Officer participation on boards of 36 giant corporations 



General classification of boards ' 


Number of companies 


Industrials 


Utilities 


Railroads 


All 


OflScer board - - 


8 
5 

7 


•1 
3 
4 




9 


Mixed board - 




8 


NonoflScer board 


8 


19 






Total 


20 


8 


8 


36 







I Basis of classification: Boards were classified as "officer boards" when they were- composed of 60 per- 
cent or more officers, as "mixed" when the percentage of oflScers was from 30 to 60, and as "nonofficer" 
when the percentage was below 30. The slightly larger span of percentages for the officer boards was deemed 
conservative because in many cases board members were either past officers or officers of subsidiaries and 
hence were closely related to the given officers even though not classified as such. Moreover, officers may be 
■expected to be more active on boards and to attend meetings more regularly. 

In the case of the railroads, management has become quite profes- 
sionalized, and increasingly remote from ownership, which is widely 
diffused. Yet the companies need many outside contacts, including 
financial ones, and the boards serve this purpose. A somewhat similar 
position is that of the utilities. The industrials, on the other hand, 
have not felt the same need for public contacts, nor are they subject 

i< The list is giveij In National Resources Committee, op. cit., pp. 100-101. 

"j;. A. Q. Robinson expresses it a little too patly but there is some truth in his statement: "Anyone 
who has ever done business with committees knows that 5 people can reach a decision, 15 people can be 
persuaded by a man who has made up his mind, and 25 people are a debating society."— The structure of 
Competitive Industry (New York: Harcourt, Brace,'1932, p. 48). 

_ " An officer is here defined as one of those listed as such in Moody's Annuals. 
, " For example, the presidents of subsidiaries are frequently on the boards of the parent companies even 
though they are not strictly classifiable as officers of the top company. ^Ov 

'8 Several prominent industrisJl^ts expressed their opinion in interviews to the effect'that tbe trend was 
elearly in the direction of replacing nonofflcers with (■fficers on the boar<?^. ^ \ 



OONCENTEATION OF ECONOMIC POWER 25 

to So complete a Separation of ownership and management, for some 
of the large industrials are still closely held. 

In those cases where there is a large proportion of officers on the 
board, such members naturally find it difficult to separate the func- 
tions of their two positions. Consequently, administrative 'detail may 
be brought up for board action and decisions may be made on the 
basis of administrative convenience rather than upon considerations 
of general policy viewed with broad perspective. The board typically 
acts on the recommendation of the interested executive. 

The boards of the giant corporations, then, provide a final and often 
perfunctory review of administrative action, past or contemplated, 
and have a varying influence in the choice of executives. In a formal 
way they pass on a multitude of items but most of this business is 
approval of committee or executive recommendations handled in a 
routine manner or after a merely cursory examination. There are, of 
course, variations, but on the whole this appears to be the typical 
picture. 

Board committees, on the other hand, are often more active and of 
more positive influence than the boards as a whole. Their power, 
of course, stems from the tendency of boards to approve the recom- 
mendations of their committees, but this does not destroy their influence. 
Approval is typically almost routine in nature. As a consequence a 
small group on a strategic committee may wield a great deal of influ- 
ence, particularly in the field of its specialty. A small finance com- 
mittee, for example, was considered the main power in Armour & ' 
Co. of Illinois for a decade. ^^ There are two influential committees in 
the board of Du Pont: The finance committee has supervision of the 
extensive investments of the company and the executive committee 
concerns itself with the operative side.^ 

Other corporations show particular committees in places of special 
influence. They may be called the finance committee, the executive 
committee, the policy committee, or by some other name. Regardless . 
of the designation, however, they serve as bodies whose recommenda- 
tions are commonly adopted by the board. 

Sometimes a committee is set up composed chiefly of officers.^' 
This group may advise on almost all broad policies or, on the other 
hand, may be limited to suggestions on handling administrative 
problems and to pointing out the managerial implications of con- 
templated action. A board composed of officers rnay be considered a 
sort of superexecutive committee, acting on its own recommendations 
and responsible in varying degrees to itself and to the chief executive 
officer of the company. Thus, a sort of circular relationship exists 
wherein "the board appoints the officers and the officers appoint the 
board." 22 

Control is not necessarily fixed at one point or vested in one person. 
It shifts from one point to another depending upon the subject 
matter involved in the particular decision. This may be illustrated 
by General Motors. The chairman, Alfred P. Sloan, is especially 
concerned with engineering and sales; the vice chairman, Donaldson 
Brown, controls financial operations; and the president, William S. 
Knudsen, who is also chairman of the administration committee, is 

" New York Times, December 16, 1933. 
»» Fortune, X (December 1934), pp. 88-89. 

" This is illustrated by the administration committee of General Motors and by the advisory committi* 
of nonboard officers of General Electric. 
M Stated in an interview by an executive of a company with an officer board. 



25 CONCENTRATION OF ECONOMIC POWER 

primarily concerned with production. Outside groups such as finan- 
cial institutions and labor unions may also exercise control over policy 
in their respective fields. 

Even where a company appears to be a one-man show, further 
examination reveals that the one man is dependent for his decisions 
upon the recommendations of his subordinates. The modern corpora- 
tion has become too large for one person to know all the details of its 
activities and of the varying social conditions in which it must operate. 
Consequently, the senior officers serve as a sort of advisory staff to 
the chief executive official. Because the chief executive official cannot 
go into the detailed implications of all decisions, he must depend 
upon his subordinates to give him the right information and to suggest 
decisions. In fact, many chief executives maintain that picking the 
right men is the most important part of their job. Thus, one-man 
decisions are almost always eroup decisions when one probes beneath 
the surface. 

Despite the limitations on concentration of policy formation and 
the various more diffused forms that it may take which we have pointed 
out, the chief executive official remains, in the typical case, the most 
influential individual in the determination of policies. It is sometimes 
said that he sets the tone of the whole enterprise. He is not, however, 
always easily identified. He may be the president or he may be the 
chairman.^^ It depends upon the tradition of the company and the 
personal influence of the incumbents of these positions. There is 
usually a two-fold division of the top managerial duties. If the chief 
officer is the president, there will often be a senior vice president who 
concentrates on problems of operation. If he is the chairman, the 
president will usually be an operating nian. 

Policy formulation and policy execution m.hy be distinct concepts, 
but it is not possible to separate them according to the position of 
those who perform these functions. Pointing out tendencies and em- 
phases is as far as one may go. At one time the presided, for example, 
may give orders which place him in the stream of policy execution. 
At another time he may make decisions or recommendations, which 
can be classified only as part of the process of policy determination. 
In general, the chief executive official of the large corporation is. more 
concerned with pohcy than is his senior subordinate. It must be 
remembered, however, that both take part in the process and both 
must draw upon the advice of others in- reaching their decisions. 
The chairman or president, with the board, may set the final stamp 
of approval upon the production quota, for example, but this action 
is based upon the recommendation of the production vice president 
or similar officer, who in turn has drawn for his material upon the 
contributions of his subordinates. 

What then is a summary statement of the extent to which policy 
determination is brought to a focus? Perhaps on the basis of our 
study only this can be said. The diffusion of ownership has given 
mariagement a predominant voice in policy formulation as well as in 
policy execution. The determination of policy has its base in the 
contributions of many individuals, but the process comes to an .approx- 
imate foous in a few. Even though one man may be the' most influ- 
ential member of the group, and may in some respects be said really 
to run the enterprise, the contributions of "others retain some of their 

** Frequently, of course, the t^o offices are combined. 



CONCE:^PTRATION OF ECONOMIC POWER 27 

identity. The finance committee m^y recommend prices and the pro- 
duction manager or operative officer suggest quotas. The result 
reached from a consideration of these factors is the determinate of 
the volume of employment so far as internal decisions are concerned. 
Corporate policies are thus characteristically group policies, though 
they may bear the clear imprint of only small groups and of influential 
individuals. 

The implications for bureaucracy and trusteeship may be stated in 
broad terms. The dominance of manageme c results in a decline of 
outside checks. This in turn may contribute to the growth of the 
imdesirable aspects of bureaucracy. The effect of many individuals 
in the determination of policy means that the sense of • trusteeship 
must penetrate below the top level. The focus of the process of policy 
determination carries the necessary implications that too much em- 
phasis should not be placed upon holding some one man responsible, 
and that whatever devices for enhancing the effectiveness of trustee- 
ship may be suggested, they rhust be such as will affect at least several 
individuals in each concern, the identity of whom varies from corpo- 
ration to corporation. 

The obtrusion of bureaucracy. — A final resuh which may.be. ex- 
pected of the growth of big business and the diffusion of ownership 
is the development of bureaucracy within large corporations. Human 
nature has certain characteristics which persist, almost regardless of 
environment. When the environments of both business and govern- 
mental employees present such common attributes as large size, im- 
personal relationships, standardized salary remuneration, a body of 
administrative rules and procedures, and the like, it is not surprising 
that they often react in corresponding ways. Corporation executives 
who have given thought to the matter are practically unanimous in 
admitting that bureaucratic tendencies (sometimes called organiza- 
tional resistance) are operative in big corporations. In those cases 
where the executive believes that these tendencies have been largely 
neutralized, they maintain that it is due to positive counteractive 
measures which have been taken. We shall deal with these later. 
First, however, we must analyze and attempt to explain the cause of 
bureaucratic characteristics which executives agree do exist in big 
business. 



PART II 

CAUSES AND MANIFESTATIONS OF BUREAUCRACY 



29 



CHAPTER IV 
THE CHARACTERISTICS OF BUREAUCRACY 

Tlie discussion of bureaucracy has commonly generated more heat 
than light. It is a term of opprobrium. In popular parlance, bureauc- 
racy is bad, rarely good. On the other hand, the term has a technical, 
literal use which makes it indispensable in the description and analysis 
of large social aggregations. Wnen employed in this sense, bureauc- 
racy loses its good-bad connotations and is merely a verbal reference 
to a complex social situation possessing certain formal characteristics 
and institutional objectives. When thus reviewed, we may say that 
an aspect of bureaucracy is desirable or undesirable, but only from 
the standpoint of the objectives sought. In the discussion of the 
subject which follows, however, it will be difficult to dissociate the 
popular, opprobrious connotation from the technical, analytical use 
of the term because we must take account of popular attitudes as 
indicators of underlying difficulties. All we can do, therefore, is to 
attempt to differentiate the two uses as occasion requires. 

Bureaucracy is characterized by successive departments, bureaus, 
and other subdivisions arranged in a hierarchy, each with its own 
particular s,phere of activity and interest, and under the control of a 
chief. To 'these attributes — a subdivision of j urisdiction and a hier- 
archy — Carl J. Friedrich and Taylor Cole ^ add a tliird: professional- 
ization of personnel. 

It is apparent that bureaucracy, defined in these terms, is very 
widespread. 2 

Whenever a large number of persons are brought together for the 
purpose of accompUshing an objective, it is essential that some direc- 
tion be given to their efforts and that individual objectives be either 
subordinated to or harmonized with those of the group. For these 
purposes a hierarchy is established. 

A system of hierarchy is as characteristic of bujsiness as it is of 
government, and in some respects the corresponding powers of the 
superior officers are more absolute in business. It is true that for 
crimes such as high treason, the state may deprive a person of his 
life. But for the great bulk of disciplinary action within a govern- 
mental hierarchy, the sanctions are no stricter than those of business 
and their appli'^ation is surrounded by limitations. The private ad- 
ministrator, on the other hand, may deprive a subordinate of his 
means of livelihood almost at will and with few, if any, procedural 
requirements. In fact, the system of hierarchy and relatively unfet- 
tered authority is widely defended as an essential part of successful 
business administration. 

' Carl J. Friedrich and Taylor Cole, Responsible Bureaucracy (Cambridge, Mass.: Harvard University 
Press, 1932), p. 18. 

» For an affirmative argument that there are general principles of administration applicable to all social 
groups, see the books of two General Motors executives, James D. Mooney and Alan C. Reiley, Onward 
Industry! and The Principles of Organization (New York: Harper, 1931 and 1939). 

31 



32 CONCE'NTRATION OF ECONOMIC POWER 

Similarly the distribution of functions and activities among depart- 
ments and their subdivisions is an accepted administrative method in 
business as in government. In business the means whereby these 
activities are allocated varies somewhat. The scope of a particular 
department may be determined by superior authority or it may be 
left, within limits, to be decided by the department heads according 
to their individual capacities, interests, and aggressiveness. As an 
ideal, the first method, supported by staff study, is frequently held 
by corporation executives to be the more desirable. In actuality, 
however, the second method enjoys wide vogue, particularly at the 
top levels of the administrative hierarchy. In either case a means 
is provided whereby the scope of a department's jurisdiction is de- 
fined, even though its borders may be somewhat indistinct and 
transitory. 

"In the establishment of determinate qualifications for executive 
personnel, which Friedrich and Cole mention as a third characteristic 
of well-developed bureaucracies, there is a considerable diversity of 
practice. But among the large corporations there are distinct ele- 
ments of such a tendency. Among the railroads, for example, execu- 
tives are recruited almost entirely from within a given company or 
from other railroads. This practice is less strong but still present in 
the utilities, and is least prevalent among the industrials. Where 
ownership and management are separate — which is characteristic of 
the largest corporations — ^it is the boast of the executives that they 
are professional administrators. Nevertheless, there is a felt need 
for a better classification and record of executive requirements and 
capacities.^ Though professionalization of management in private 
business varies, it is present and welcomed by those in control of the 
larger corporations. 

To the extent, then, that these elements — distribution of functions, 
hierarchy, and professionalization — constitute the essential charac- 
teristics of bureaucracy, this term describes large-scale private business 
as accurately as it does public administration. There are, however, 
other characteristics of administration which are included in the 
concept of bureaucracy when used as an invidious term. These 
appear to stem from the more fundamental aspects which we have 
mentioned and are perversions, improper functionings, or undesirable 
accompaniments of them. The more important merit examination. 

The most general criticism of bureaucracy is its unresponsiveness 
to the demands of the public and to hierarchical superiors. Thus, 
Friedricji and Cole have commented : 

We condemn as bureaucratic the delay and lack of response from the repre- 
sentative of a large organization, whether public or private, because we do not 
sympathize with or do not understand at all the ultimate objective or combination 
of objectives which this organization is supposed to realize. In such situations 
the word "bureaucracy" is widely used to decry acts of officials which, while required 
for the sake of "Efficiency," are cumbersome and irritating to the person sub- 
jected to them. * * * 

Since the government is by far the largest single organization of this variety, 
the cumulative effect of such experiences has in the mind of most people prevented 
any realization of the fact that a church, a trade union or a business corporation 
tends to show the same characteristics. * * * 

It is easier to overestim.ate than to underestimate the difference between such 
governmental buj'eaucracy and the church bureaucracy, the party bureaucracy, 
or the bureaucracy of the business corporation. Much depends upon the cir- 

' See, for example, Edward R. Stettinius, Jr., "The Selection of Executives," Management Review, XXV 
(November 1936), pp. 332-33. 






CONCENTRATION OF ECONOMIC POWER 33 

cumstances of time and place. * * * ^.ny large body of men organized for 
common action will tend to act in a way which will appear arbitrary and there- 
fore irrational to the outsider, although the particular act may be copapletely 
rational when looked at from within. < 

The take-it-or-leave-it attitude on the part of the trusts contributed 
largely to the movement to control them. Just as the monopolies 
were not destroyed, however, neither was the attitude, though in 
many cases it was softened or became more suaVe. It took highway 
and air competition to wake the railroads to the importance of the 
passenger. That paragon of service, the filling-station employee, is 
directly related to the ease with which the motorist may drive to 
another station. The threat of public ownership has been a prominent- 
reason for the emphasis upon public relations in the telephone in- 
dustry. In those monopolistic or semimonopolistic areas where no 
such threat of competition exists, on the other hand, it is only natural 
to find a lower degree of responsiveness to public desires. 

To the extent that unresponsiveness within the hierarchy exists, 
the purpose of the organizational structure itself is not, being wholly 
fulfilled. The executives of the large corporations almost universally 
admit in interviews that they find varying degrees of organizational 
resistance among their subordinates, and that drastic means are some- 
times necessary in order to overcome this tendency. 

Unresponsiveness, it should be noted, is a broad term which in- 
cludes four other more specific aspects of bureaucracy. These are an 
excess of rules or legalism, maladjustment of the working parts of the 
organization, a low level of morale, and the tendency of persons and 
organizational units to enhance their own importance. 

The extensive use of more or less rigid and precise rules and working' 
procedures is well-nigh universal among the giant corporations. In 
no other way can such large administrative units be made to operate 
consistently. However, what may be necessary from an adminis- 
trative viewpoint is often irksome to the public, which does not 
understand the administrative implications of a given order. "Sorry, 
it's a company rule," doesn't help to make an exasperated customer 
feel that his particular case is being treated with much consideration. 
Within a corporation, furthermore, subordinate officials often com- 
plain that thay are not permitted sufficient discretion, that transac- 
tions of any size must be referred through too elaborate channels. 
When questioned on this, however, the superior officials are quick to 
point out that there are aspects of such transactions which subor- 
dinates cannot understand. For consistency and safety, therefore, 
the top executives claim that limitations are necessary. Indeed, a 
whole philosophy of management — that of scientific management — 
is largely predicated on the idea of elaborate rules established for^ the 
most simple and routine actions. An unwieldy body of regulations 
is thus inevitably built up, and it becomes e&sj to forget the objec- 
tives of the system in a blind obedience to rules. 

Maladjustment of the working parts of an organization is also 
frequently cited, both in bu? mess and in government, as evidence of 
the evils of bureaucracy. Instances are adduced where one part of 
a hierarchy worked at cross purposes with, or wasted its efforts by 
duplicating the efforts of, another. Illustrative is a case brought out 
in an interview. The company concerned is subdivided on the basis 

* Friedrich and Cole, op. cit., pp. 1, 2, 14, 22. 



34 CONCENTRATION OF ECONOMIC POWER 

of products, though there is great similarity among them. Never- 
theless, the officials of one division frequently consult with outside 
competitors on research, production, and other problems rather than 
attempt to discover what colleagues in their own concern had done 
along those particular Unes. 

It is anomalous that this malcoordination should be called a char- 
acteristic of bureaucracy. It exists because an essential purpose of 
bureaucracy, the coordination of effort, is not being fulfilled. Such, 
however, is the common conception. No official either of a large 
corporation or of government would claim that complete coordination 
exists in his organization. This lack, therefore, is attributable to the 
failure of bureaucracy rather than to its active effect. 

A low level of morale is also considered part of the typical picture 
of bureaucracy. The bureaucrat is viewed as weighed down with 
rules, procedures, and red tape, mired in his own particular rut, 
iminterested in getting out of it and unable to do so if he would. 
Likewise he is loath to exert any great effort to advance the work of 
the enterprise. 

The level of morale at a given time is difficult to measure because 
it is comparative and its elements are largely subjective.^ Many 
executives, however, will admit that the morale of their employees 
is not especially high or that it was very low before a particular per- 
sonnel poUcy was adopted. Among the corporate giants the company 
with a high level of morale is indeed rare. On the basis of interviews 
and observation, there appears to be a medium level around which 
most of the employees cluster. Extra time and effort in cases of 
emergency are grudgingly given. Some officials complain that 
potential executive material is destroyed by the dulling environment 
at the lower levels of the hierarchy, causing irreparable loss to the 
company and employees concerned. Others say their men are in a 
rut and do not have a broad view. 

Finally, a generally criticized characteristic of bureaucracy is the 
tendency of persons and organizational units to increase their own 
importance. "The inherent tendency of bureaucracy to expand" is 
one of the most common complaints directed at government.^ This, 
of course, is an almost universal human tendency. Individuals 
cherish an increase in status; chambers of commerce seek to make 
"the biggest little town in America" a httle bigger; a corj)orate man- 
agement is looked upon with suspicion of inefficiency if it is unable 
to report that this year the company is larger or did more business 
than last, particularly if there has not been a general decline in the 
level of trade. 

This tendency is recognized by corporation officials as operative 
within their enterprises. They complain that executives are too 
anxious to appear to have an individually outstanding record even 
though it may be at the expense of the corporation as a whole. Illus- 
trative are these comments: 

The executive personnel has the short view. Their own achievement is all that 
counts, not the long-time corporation record. For example, one executive set 
up a hundred new dealers in order to show an 8-percent increase in sales even 
though it was ruinous to the extablished agencies. 

' A rather extensive literature has been erected upon the base of some limited experimentation along this 
line at Western Electric's Hawthorne plant. For a summary, see Luther Gulick and L. Urwick, editors, 
Papers on the Science of Administration (New York: Columbia University Press, 1937), ch. VH. 

' Friedrich and Cole point out that "under certain conditions, a bureaucracy shows no such tendency at 
all (post-war France, on the whole, for example)," op. cit., p. 18. 



I 



CONCENTRATION OF ECONOMIC POWER - 35 

A manager knows he will move on in 2 to 5 years. Therefore, he wants to 
squeeze everything out in profits instead of planning a long-term program. 

It is apparent that the evils of bureaucracy, as evidenced by unre- 
sponsiveness, excessive internal legalism, maladjustment of working 
parts, low morale, and the tendency of persons and organizations to 
enhance their importance, are not confined to any particular class of 
human endeavor. Bureaucracy seems rather to inhere in large organi- 
zations. Business as well as government must use essentially the 
same human raw material to operate, and it is, therefore, subject to 
the same bureaucratic forces which take their administrative tolls. 
It is apparent, however, that some busmess concerns are more unfortu- 
nately bureaucratic than others, just as are some departments of 
government. 

We need, therefore, to examine the causes of the objectionable 
features of bureaucracy, together with the administrative remedies 
which are available. For this purpose, the causes of bureaucracy 
may be roughly classified as structural and personnel, though it must 
be recognized that the division is chiefly one of convenience. 



CHAPTER V 
STRUCTURAL CAUSES OF BUREAUCRACY 

The .broadest structural cause of bureaucracy, whether in business 
or in government, is the tremendous size of the organization. Thus, 
with capital or appropriations measured in hundreds of millions and 
in bUlions of dollars, and personnel in tens and hundreds of thousands, 
it is difficult to avoid the obtrusion of the objectionable features of 
bureaucracy. For a clearer analysis, and limiting our discussion 
chiefly to the matter of bureaucracy in business, we must break this 
broad structural cause into its smaller components. 

The first of these constituent causes is the separation of ownership 
and control in the large corporations. Dennison and Galbraith 
comment: "We hazard the guess that ossification of the corporate 
bureaucracy, favoritism, nepotism, and inadequate personnel control 
become more serious when the ownership interest (which pays the 
bill) is weak or without voice in control.^ Our observations tend to 
substantiate this guess. There is an almost universal tendency for 
human beings to fall into a rut unless there is somp stimulation 
present. The demand for efficiency by an articulate owner consti- 
tutes one, type of such pressure which helps to force management out 
of its lethargy, though of course there are other pressures which act 
with similar effect. We have already noted the extent to which owner- 
ship has become diffused in the large corporation. As a result, so 
long as dividend payments are somewhere near being satisfactory, 
the owners will^not put pressure upon management to reduce adminis- 
trative costs. A natural result is for bureaucratic wastes to increase, 
particularly where earnings can be readily maintained in spite of this 
drain. 

A second structural cause of bureaucracy is the diffusion of authority 
in some enterprises. Regulatory and operative officials of railroads, 
for example, agree in interviews that this is an important cause of the 
ill effects of bureaucracy in this particular field. The management is 
limited in the extent of its control in administrative matters, and hence 
unity of command is lost. The Interstate Commerce Commission lays 
down rather elaborate rules of accounting procedure, passes on exten- 
sions and withdrawals of facilities, enters into the fixing of rates, super- 
vises reorganizations and other changes in capital structure — in short, 
has much to do with the management of the :^ailroads. The banks, 
insurance companies, and other sources of capital are particularly con- 
cerned with riianq,gement during periods such as the railroads have • 
recently been passing through. The strong labor unions supply rigid 
wage and seniority rules and enter into personnel administration in 
many of its aspects. In a given administrative situation, then, there 
may be several separate and independent entities each having a degree 
of authority. One may desire one course of action, the other some- 

' Dennison and Oalbralth, op. cit., p. 74. 
36 



CONCETsTRATION OF ECONOMIC POWER 37 

thing different, or an affected employee may know that he can play 
one group off against its rival. The result is confusion, inaction, and 
the perpetuation of administrative defects. 

The railroads, of course, are not alone in having a divided adminis- 
trative authority, for a somewhat similar picture is presented by the 
utilities and by many of the industrials. This merely illustrates one 
of the ever-present dilemmaa which accompany change. As responsi- 
bility for and limits upon administrative actions are extended — in a 
sense, as trusteeship is made more effective^the undesirable elements 
of bureaucracy may also unfortunately increase. The object should 
be to establish the requisite degree of public control and at the same 
time to maintain administrative efficiency. 

Furthermore, the diffusion of authority is not confined to the distri- 
bution of powers between the administrative hierarchy and various 
outside groups. It also exists, according to the testimony of execu- 
tives in interviews, within the hierarchy itself of many corporations. 
Thus, for example, when department heads are on the board they are 
in a sense both equal or superior and at the same time iiiferior to the 
president or the chairman. This, it has 'been said, has a diffusive 
effect on authority. Matters which concern a department are taken 
up at the board meeting, and. the department head, who may be in 
disagreement with the executive head of the -company on how they 
should be handled, may not only state his case but has equal voting 
power with the top executive in determining the final decision. A 
somewhat analogous situation would exist if the departmental and 
bureau officials in the Federal Government, who now have contact 
with legislative committees and sometimes give advice contrary t(> 
that of their superiors, were not only able to influence legislation and 
contribute to divisive bureaucracy as much as they do now, but were 
actually allowed to votp, as members of the particular legislative com- 
mittees concerned. 

In addition^ the officer board may present an impediment to admin- 
istrative unity in still another way. Thus, some executives report 
that'the officer members, on leaving the board meetings, act before the 
policy adopted or the decision made in the meeting can be adequately 
translated into a unified series of orders. Or again, headquarters staff 
men issue instructions to line executives, who- thus are placed in the 
position of taking orders from a number of persons. When there' is 
no central clearance; these sometimes conflict and confusion results. 
"We have lots of fights with men in the "field," one such staff man 
remarks. 

Of course if all action had to clear tjirough strictly proper hierarch- 
ical channels, in a large enterprise the steps would be numerous and 
complicated and extended delays would ensue. On the other hand, 
if short cuts are to be taken, such as the direct dealings of staff and 
line men mentioned S,bove, confusion and- conflicts are equally likely 
to occur. This is another of the many managerial situations which 
illustrates the proposition that bureaucracy is inherent in large-scak 
enterprise. Both horns of the dilemma are labeled with that word. 

An important stone in the logical edifice which Frederick Taylor 
built was that the worker at the bottom of the hierarchy should have 
as superiors a number of so-called functional foremen, each giving 
instructions in his particular field. In actual practice, however, this 
organizational device never received wide adoption in American 



33 CONCENTRATION OF ECONOMIC POWER 

industry. Even though Taylor conceived of a planning and coor- 
dinating staff at headquarters which would supply unity and direction, 
the system engendered too much confusion.^ 

Nevertheless, even though the functional-foremen part of Taylor's 
plan was found unworkable at the bottom levels, something closely 
resembling it in the upper levels has sprung up. As a necessary com- 
promise between specialization and order with unity, functional execu- 
tives advise subordinate line officials in the realms of their specialties. 
This works very well so long as everyone recognizes that advice is 
what is being issued. But the dividing line between advice and com- 
mand is so dim as to be frequently indistinguishable in practice.^ In 
fact, no such line can be drawn. When what seem to be orders to 
those concerned come from several sources, the executives find them- 
selves in much the same state of confusion as do the workers under 
functional foremen. The testimony of the executives of large cor- 
porations indicates that this condition does exist in parts of their 
domains, although it may be excused, perhaps, as an unfortunate 
concomitant to necessary administrative informality. 

A third cause of bureaucracy which results from size is the for- 
malization of interpersonal relationships. In a very small enterprise, 
face-to-face contacts and informality are characteristic. LoUg before 
the level of the giant corporation is reached, however, the superior 
officers are several steps removed from the laborers and foremen. 
No longer is it possible for the boss to say personally to his .workers, 
"This is what I want done and the way I want it done," nor can the 
workers tell the boss what they think would be better^ objectives or 
methods. The number of persons concerned in a large enterprise 
precludes- such simple arrangements. Rather, a hierarchy must be 
set up and rules established in order that the efforts of thousands of 
employees may be directed toward common objectives. 

Perhaps it will be considered possible to maintain the interpersonal 
characteristics of a small enterprise in a large one. This might be so 
if each small subdivision were run as a separate business. Such a 
procedure, however, would sacrifice much of the advantage of the 
large enterprise. Specialization among departments would have to 
be eliminated and its benefits }ost. Coordination of the work of the 
various groups of workers would be difficult. In actuality, therefore, 
not only is a hierarchy necessary in a large enterprise, but also a set 
of rules whereby the members of the hierarchy must act. 

The extent to which formal rule-making is carried in the large enter- 
prises varies widely. Some companies have been casual about it, but 
others have worked out elaborate and detailed sets of instructions 
which are published aiid sent to all officers who are concerned. In 
Armour & Co., for example, a loose-leaf book of regulations is issued 
to all branches and is revised from time to .time. Similarly, in the 
American Telephone & Telegraph Co. the "Bell Bible," as it is 
familiarly known, is a comprehensive collection of th« rules and, 
standards which apply to particular parts of the system. The 
regulations covering a single department in this company constitute 
an impressive pair of loose-leaf volumes. Those of immediate con- 

• • For a good review of Taylorism, see H. S. Person, editor, Scientific Management In American Industry 
(New York: Harper, 1929). 

' For an excellent discussion of the actual nature of authority see Chester I. Barnard, The Functions of 
the JExecutive (Cambridge, Mass.. Harvard University Press, 1938), ch. VII. Barnard is president of the 
New Jersey Bell Telephone Co. 



CONCENTRATION OF ECONOMIC POWER 39 

cern to, say, a telephone installer are also issued in a loose-leaf booklet 
of pocket size. The instructions themselves are very explicit, setting 
forth in detail the exact methods to be followed and the extent to 
which a person should use his own judgment. In other corporations 
which did not have so complete a system of procedures applying to 
standards, methods, anti supervisory practices, the executives ex- 
pressed the belief that such a body of rules should be developed and 
adopted, particularly for use at the lower levels. 

The control systems which all of the large corporations use must 
include uniformity in reporting in order to make that control effective. 
When results are judged only on the basis of net profits for particular 
subdivisions, reporting-procedure rules are simple. In the Du Pont 
Corp., for exa.mple, the executive committee determines what per- 
centage on the investment each subsidiary or operating department 
should make, and the operating head is then given considerable 
leeway in devising administrative methods whereby the quota may 
be reached. If it is missed, he will have some explaining to do, but 
otherwise he will be relatively free in administrative matters.* When 
detailed control over expenses, sales, and the like, is attempted, on 
the other hand, the reporting rules and procedures must be more 
extensive. One item of expense must mean the same thing through- 
out the enterprise. This process is still further refined when, as in the 
Bell System, control items extend to such things as the percentage of 
errors in handling telephone calls. Just what constitutes an error, for 
example, must be carefully defined. 

Thus, in all of the large corporations rules of a more or less explicit 
nature must be utilized. But they formalize inter-personal relation- 
sh:ps and thus contribute to the ills of bureaucracy through the decline 
of the human touch. 

The use of rules can, of course, be carried too far. "The tempta- 
tion is to hide personal responsibility behind rules and regulations." " 
Moreover, the attempt to cover every conceivable situation by means 
of a definite rule for the sake of uniformity can result in such a maze 
of instructions that they are a hindrance rather than a help. John 
Lee has aptly said, "It is possible so to refine the sense of justice as to 
negative positive action." ^ Henry Dennison expresses the same 
thing in another way: "Attempting to manage without rule& is doing 
by hand what might be better done by machine; attempting to 
manage entirely through rules — to let rules manage for you — is to 
overmechanize and to suffer from rigidity." ^ . 

It is difficult to determine whether, from the standpoint of internal 
administration and considering the companies' needs, the use of 
rules in the giant corporations has been overextended or somewhat 
neglected. 

Some executives feel, for example, that rules have been carried too 
far;* others that- they have not been developed far enough. From 
the extensive use of rules as administrative tools it is an easy step 
blindly to follow or to use them as an excuse for decisions which show 

• See "Du Pont: A Management and Its Philosophy," Fortune, X (December 1934), pp. 86ff. 

• John Lee, "The Parallels Between Industrial Administration and Public Administration," Public 
Administration, IV (1929), pp. 216, 221. 

• Ibid., p. 222. 

' Henry S. Dennison, "Who Can Hire Management?" Bulletin of the Tavlor Society, IX (June 1924), 
p. 101. 

• One official claimed that his outstanding accomplishment as executive officer was that of reducing the ' 
number of written regulations. As he expressed it, "You can't expect a good man to show his abilities 
unless he is given freedom to put his ideas into operation." . . 

258325 — 40— No. 11 4 



40 CONCENTRATION OF ECONOMIC POWER . 

administrative incompetence. This emphasis on legaUty is apparent 
in Government, but its obtrusion in private business is equally clear. 
This is illustrated by the fact that the top executives of some cor- 
porations repeatedly have to emphasize that results are more desirable 
than blind conformity to rules. It should be remembered, however, 
that in the case of regulated enterprises, such as the railroads and 
the utilities, legality may be as or even more important than results 
in particular cases. 

From the standpoint of the customer or the public, corporate 
rules — or "company policies" as they are sometimes called — may 
seem bureaucratic in the extreme. Since methods and practices 
are determined by administrators, it is natural that they should 
reflect administrative rather than public convenience. This is 
generally true except where a sufficiently strong counter-force can be 
applied to make the self-interest of the administrators synonymous 
with public convenience. 

Corporation officials themselves mention examples where rules are" 
a hindrance. A former official of one giant corporation cites this 
example: The corporation had contracted with another to supply 
equipment. Some of it was unsatisfactory and the management of 
Corporation A decided to use superior equipment which they could 
get for less money. Corporation B threatened to sue, but one of the 
vice presidents came around to Corporation A's viewpoint and told 
them they could use the superior equipment. A second vice president 
was, however, concerned in the matter and he protested to his colleague 
and an official of Corporation A: "You can't do that. We have our 
policies and they won't permit it." The other vice president countered 
with: "But this is my field and I stick by what I told them." The 
reply which closed the conversation was, "I don't believe in bringing 
out our family quarrels into the open. We'll consider and let you 
know." After some delay, however, Corporation A's viewpoint was 
. sustained. Ordinarily customers could expand ad infinitum the list of 
irritations resulting from rules. 

But merely because rules are iiritating or rigidifying does not 
necessarily m«an that they should be abandoned. They cannot be 
dispensed with and unity of action retained. The administrative 
problem is carefully to weigh the merits and demerits of particular 
regulations and' to adopt only those whose benefits are clear. A 
corporation official aptly warns: "It is easy to go too far in rule- 
making." Even a well-conceived body of instructions will invariably 
have some ill effects. It illustrates what we have already pointed 
out: you can't take all of the bad effects of bureaucracy out of the 
necessary bureaucratic structure. 

Closely allied to the system of rules, written and unwritten, which 
pervades the large corporation is the aura of institutionalism which 
surrounds many of these enterprises. In a complaint on the dearth of 
leadership, for example, a prominent member of the Taylor Society 
has said: 

• The nature of our industrial institutions has become such as to render almost 
inipossible the einergence from that source of leadership with a collective point 
of -view. When a young man enters into the service of a corporation Ke enters 
into a bureaucracy which has institutional ideals, aims, and purposes; and a 
powerful though perhaps unwritten institutional code. 

Generally he realizes little opportunity for individuality and self-expression 
«xcept insofar as these conform strictly to the institutional aims and bureaucratic 



CONCENTRATION OF ECONOMIC POWER 4 J 

code. The consequence is that feW individuals in the service of corporations can, 
while they are still young and plastic, break through the restrictive shell and 
stand forth as leaders unrestrained by particular interests.' 

In a somewhat similar vein, a leading utility executive tells of his 
impressions when he first entered a giant corporation: 

The constantly expressed phrases — "The good of the organization," "The 
service as a whole" * * * seemed to be the real basis for what I at first 
felt to be repression of the individual who was becoming less and less significant. 
This repression was evident not so much in specific directions concerning work 
to be done as by inhibitions and prohibitions arising out of the intangible barriers 
of departments, grades and ranks, policies, appropriations, laws, prejudices and 
economic limitations of consumers. * * * . 

I was in danger either of falling into a complete lethargy from my inability 
to reconcile two apparently contradictory (individualistic and collectivjstic) 
states of affairs; or of attempting to treat myself either as a slightly conscious 
and unimportant cog in a gigantic machine, or as an anarchist determined to 
assert my individuality in destructive action. You can see all about you men 
and womei; whose escape from the dilemma * * * has been through one of 
the three doors I have described. * * « 

I happily escaped from the dilemma through the fourth door which was that 
of directing my individual efforts not only in conformance with, but in furtherance 
of, the objectives of the organization.'" 

Individualism in the sense of freedom of action does not exist to 
any appreciable extent in the large corporation. For the few who are 
in control, such a state may obtain; but for the thousands of workers, 
their fortune is to adapt their individualism to the demands of the 
organization. "Our company is no place for an individualist," one 
executive of a giant corporation has succinctly said. Although the 
institutional needs of the corporate bureaucracy demand this, its 
effect is often to deaden initiative and to lose potentially valuable 
executive material. 

Another cause of bureaucratic confusion and indecision is the often 
inadequate definition of the scope of authority and responsibility 
among the various departments and executives. There is almost 
universal agreement among administrative theorists that the scope of 
authority and responsibility should be rather concretely outlined, 
even though they recognize that the rule is more often broken than 
obeyed. Among corporation executives there is a similar agreement 
as far as the lower levels of the administrative hierarchy are concerned. 
In rega'rd to the upper levels, however, there is a sharp diflPerence of 
opinion among the practitioners. For one group this statement is 
typical: "At the highest level, organization is merely a matter of 
common sense, good will, and informal relationships. There can be 
no hard and fast organization and lines of control at the top." But 
an executive in the opposing camp counters with: "You can't do a 
job until you know what it is. The attitude that lines of communica- 
tion and authority become informal the nearer the top you get, and 
can be precisely defined only at the lower limits, is due to laziness and 
inertia. The executive fights like a steer against defining his own job. 
The very men who resist are almost invariably the ones who need 
such definition most." 

At the lower levels of most large corporate structures job definition 
has made considerable progress, whereas at the top flights little or 
nothing has been done, with a few notable exceptions. Indefiniteness 
may cause delays and jealousies, whereas, an excess of rigidity almost 

'H. S. Person, "The Call for Leadership," Bulletin of the Taylor Society; XVIH (June 1935), p. 41. 
'»/Che£tar I. Barnard, Collectivism and Individualism in Industrial Management (New York: Amerlcao 
Telephone i Tdegrsph Co., 1934), pp. 4-5. 



42 CONCENTRATION OF ECONOMIC POWER 

certainly causes inefficiencies. Either extreme is objectionable. The 
proper balance is the goal. 

A sixth structural cause of bureacracy of which executives complain 
is the difficulty of commimication and integration because of the 
number of hierarchical and interdepartmental divisions, and the 
separatism and insulation which exists among them. A number of 
executives list this as one of the principal or even the principal weak- 
ness of big business. 

One official, for exampk, has said, *'The larger an organization 
becomes, the more difficult it is for all concerned to obtain information. 
No one can see everything, know everything, or be acquainted with 
eveiyone." Some of the giant corporations have eight, ten, or even 
more steps in the hierarchy. Effectively to cross all of these bridges 
with, plans or suggestions is a major problem. For one thing, ideas 
change as they pass from one mind to another; their final interpreta- 
tion may be something quite different from the original proposal, 
and they may even be completely lost in the process. The possible 
ineffectiveness of the resulting action, if any, on the many fronts 
concerned is obvious. Furthermore, taking the required number of 
steps is time-consuming, and decisions may in the end be so far re- 
moved from the point of action as to be useless.'^ "When the im- 
portant decisions are infrequent, and the necessity for a quick decision 
is less urgent, the large firm can play its part more efficiently." ^^ 
When more rapid action is required, however, the large enterprise 
often reveals its bureaucratic inflexibility and finds itself unable to 
act with dispatch. And even though a procedure for speedily handling 
emergencies may be developed, routine matters necessarily take 
longer in the large than in the small enterprise, despite the best ad- 
ministrative methods. 

In the large enterprise 'the advantages of functional specialization 
are apparent. Because of the scope of the giant corporation it may 
be profitable to have a number of specia,lists devoting full time to 
small sections of the immense administrative and technical problems 
of big business. This, however, results in bureaucratic rigidification 
in two principal ways. In the first place, the multiplication of special- 
ists means that at a given level of the hierarchy more persons are 
responsible to one executive than is the case in smaller enterprises. 
Just what may be the optimum number of immediate subordinates 
which one executive can effectively handle is difficult to say, since 
so much depends upon the executive and upon the type of work which 
is being done. There are, however, outside limits which are often 
exceeded. Other things being equal, the larger the number of im- 
mediate subordinates, the more difficult the problem of communica- 
tion and integration. It has been demonstrated that with an arith- 
metic increase in the number of such subordinates, the inter-personal 
relationships — and necessary lines of communication — increase in 
geometric ratio. '^ The result is that many executives find their 
eft'ective span of control exceeded, with resulting confusion and loss 
of integration.*^ 

" John H. Williams makes this )pst point. Pee his "Is There an Optimum Size of Organization?". 
Bulletin of the Taylor Society, XV (February 1930), p. 22. 

" E. A. O. Robinson, The Structure of Competitive Industry (New York: Harcourt, Brace & Co. 
1932). p. 49. 

" See V. A. Graicunsis, "Relationship in Organization," in .Gulick and Urwick, editors, op. cit., eh. X. 

'< For a more comprehensive presentation of the problem of the span of control, see Marshall E. DImock, 
"The Span of Control in the Federal Government," Society for the Advancement of Management Journal, 
HI (January 1938), pp. 22-28. 



CONCENTRATION OF ECONOMIC POWER 43 

Secondly, the development of functionalism and specialization 
also makes communication more difficult because of the loss of a com- 
mon language and understanding. Each specialist becomes engrossed 
in his own field and knows progressively less of the problems of his 
colleagues m the enterprise. Inter-departmental insulation thus 
develops. Moreover, with well-developed specialization among his 
subordinates an executive finds it difficult to coordinate those directly 
responsible to him. He cannot be expected to know all about each 
of the specialties and so he cannot see all of the ways in which the 
affect each other. The head of one enterprise sums it up in this way : 
"A grave defect of the large-scale concern -is that the executives 
become too specialized. Each man has his own department and he 
loses perspective. The business is segmented. The top executive 
loses touch." 

Thus, functionalism has bureaucratic results. Its advantages, 
however, are so great that it is not possible to seek a return to simple 
organization. "The functional system is inevitable, but it is the 
work of human beings to safeguard humanity against many ills 
which seem to accompany movements apparently inevitable." ^^ 

In summary, we have mentioned six groups of structural forces 
which stimulate the obtrusion of bureaucracy in big business. These 
are the separation of ownership and control, the diffusion of authority 
in and over an enterprise, the formalization of rules, the growth of 
corporate institutionalism, the lax definition of authority and responsi- 
bility, and difficulties of communication and integration. Not all 
of these are of equal importance in all large enterprises, but all affect 
many of the corporate giants. 

These structural factors, however, are only some of the causes of 
bureaucracy in business. What we have called the personnel factors 
are fully as important. To an examination of these elements we 
may now turn. 

"John Lee, "The Pros and Consof Functionalization." Bulletinof the Taylor Society, XIV (June 1929) 
lU. 



CHAPTER VI 
PERSONNEL CAUSES OF BUREAUCRACY 

Ineffective leadership. — Among the personnel causes of bureaucracy 
of which busmess executives and students of administration most 
often complain is the lack of competent, effective leadership. As 
the head of one enterprise has remarked, "there aren't enough first- 
class executives to go around. They are almost as rare as inventors 
and first-class research men, so unusual a combination of qualities — 
plus an ounce of 'divine spark' — must they possess." Herbert Em- 
merich has criticized the popular idea that "a good executive is a 
'no man' entirely surrounded by 'yes men.' " "Executive manage- 
ment," he has said, "is a constant process of evoking from the human 
beings who comprise an organization their best contributions toward 
its work. This cannot be accomplished in a negative atmosphere. 
The top executive of the future will bend most of his efforts toward 
discovery arid release of the creative forces of his organization, not to 
their suppression . " ^ 

The necessary executive traits are by no means few or simple. In 
one instance they have been summarized thus : 

The successful leader is characterized by a reasonably high degree^ of such 
personality traits as initiative, enthusiasm, imagination, knowledge, originality, 
persistence, speed of decision, and purpose. His relations with his followers are 
characterized by sympathy, tact, patience, faith, prestige, and ascendance- 
submission.2 

Ordway Tead has written extensively and perceptively on the sub- 
jeibt of leadership. Among the qualifications which he sets forth are 
physical and nervous energy, enthusiasm, an adequate technical 
knowledge or skill in relation to the project in question, mental alert- 
ness, imagination or the ability to work with the data of past ex- 
.perience in newly conceived combinations, knowledge of hurnan nature, 
a belief in the spontaneous and self-generating powers of individuals 
in groups if they are given a chance to exercise them (or more simply, 
faith in people), coiu-age, persistence, initiative, tact, patience, self- 
confidence, a sense of humor, and purposiveness. Moreover, he 
stresses : 

Creative leadership can best manifest itself only under those corporate condi- 
tions wherein a consistent way and in terms of practical working devices, and not 
merely in verbalisms, the corporation is demonstrating clearly to its workers that 
it desires to consider them as partners in a group enterprise and not merely as 
agents for the piling up of excessive profits for absentee owners. * * * The 
leader, it must be emphasized, is not a beguiler, a bully, a seducer, or a hypnotist 
in respect to the purposes of those whom he leads. Only as he is a teacher and 
inspires and is fully envisaging broader and broader aims can his appeal remain 
effective.^ 



1 Herbert Emmerich, "Some Folklore of Executive Management, Public Management," XX (September 
1938), pp. 264-267. 

» H L. Smith and L. M. Krueger, A Brief Summary of Literature on Leadership (Bloomington, Ind.: 
University of Indiana, School of Education, 1933), p. 38. 

' Ordway Tead. "The Nature and Uses of Creative Leadership." Bulletin of the Taylor Society, XII 
(June 1927), p. 394. 

44 



CONCEIS'^TIIATION OF ECONOMIC POWER 45 

An executive of one of the country's largest enterprises has pointed 
out that the power of the president of that company was in fact not 
nearly so great as was generally supposed. "If he can't keep the 
confidence and esteem of his vice presidents and the presidents of the 
subsidiaries he will be ineffectual." Just as the head of a company 
is dependent upon others in the formulation of his decisions, so also 
is he dependent in their execution. 

The field of leadership as a whole is too ^road a subject to be dis- 
cussed here in detail. We may, however, i .ei; uion briefly some of its 
elements as they bear on the direction of the large corporation. 

The importance of leadership is universally acknowledged. With 
almost equal unanimity corporation officials testify to the difficul- 
ties which attend the training and promotion of leaders to fill positions 
where their influence is needed and where it will be effective. Al- 
though the degree to which the executives of large corporations inspire 
their subordinates is too subjective for extended consideration we may 
nevertheless mention some of the more important aspects of the 
matter. We have evidence, for example, that the leaders, and par- 
ticularly the chief -executives, set the ton* of the whole enterprise. 
It is, therefore, important that this tone, with its direct effect on 
morale, be not characterized by the harmful elements of bureauc- 
racy which we have indicated. 

For our present purposes the discussion of the relation of executive 
leadership to bureaucracy may be confined to five general require- 
ments. These are that the executive not be too old upon appoint- 
ment; that he possess a broad outlook; that he reach office primarily 
on the basis of merit; that he remain in office long enough to be 
effective but not so long as to become senile; and that positions of 
leadership be attractive to potential leaders. It is recognized that 
these are capable of broad interpretation; we may, however, note 
tendencies in each of them. 

A leading figure in the field of industrial management maintains: 
"It is hardly to be gainsaid that with the steadily increasing age at 
which executives reach the top rank of president or chairman of the 
board, they find themselves physically, as well as intellectually less 
able than under former conditions of corporative simplicity to cope 
with the question of future progress and growth." * It cannot be 
flatlj^ said, of course, that advanced chronological age means a cor- 
responding loss in mental resiliency. Daniel Willard, president of 
the Baltimore & Ohio Railroad, and the late Justice Holmes serve 
amply as refuting examples. There can be no doubt, however, that 
there is a general tendency in this direction — that, in general, resili- 
ency is lost with age. Because of this, summary figures on age have 
meaning in relation to corporate leadership. 

Table X presents some biographical data on the heads of 35 of 
the Nation's largest companies. The size of the sample is small, but 
it should at least indicate some of the tendencies. 

For this group as a whole, the chi^f exeiutives were appointed at 
an average age of about 50 years. By 19 J) they were approximately 
61 years old, having served an average c ibout 11 years. As might 
be expected there is much variation • r ong the companies. For 
example, in the cases of three of the i idustrials and two of the 
utilities, the chief executives were oho .e i at the age of 40 or less. 

* Harry A. Hopf, In the Georgetown L£.w Journal, XXIV (1 J8), p. 1067. 



46 



CONCENTRATION OF ECONOMIC POWER 



At the other extreme, one railroad and one industrial had heads who 
were more than 64 years old when appointed. Obviously the term of 
office for these older men must be relatively ^hort.^ In general, it 
may be said that with an average age of 50 iot the group as a whole, 
a number of these executives were advanced to top positions when 
they were somewhat beyond their prime. 

Table X. — Executive heads of 35 giant corporations, 1939 ' . 





Agf jn up- 

pointment 

to present 

position 






Years in 
particular 

field of 
business ' 


Source, in percent ' 


Corporate group 


Age in 1939 


Years with 
company 


Promo- 
tion from 
within 
com- 
pany 


Brought 
from 

outside 
com- 
pany 




M9.3 (49.6) 

46.3 (45.0) 

. 55.0 (55.0) 


61.3 (60.6) 
55. (67. 0) 
62.0 (64.2) 


36.3 (30.7) 
20.0 (19.4) 
38.0 (34.9) 


37.3 (34.2) 
30. 5 (31. 1) 
40.0 '(42.1) 


90 
70 
75 


10 


Utilities 


30 


Railroads.- 


»25 






All -. 


50.5 (49.9) 


60.7 (60.6) 


36.0 (29.3) 


37.3 (36.4) 


80 


20 



• The group includes 19 of the 20 largest industrials (data was unavailable on 1), the 8 largest utilities, 
and the 8 largest railroads. With the 1 exception, this is the same group of corporations whose directorships 
were analyzed on p. 24 S., supra. Data on 2 industrials and 1 utility are incomplete; averages in the 
affected categories are derived from the remaining number. 

2 Figures are very rough because the point of entry into a particular field is difficult to define. 
' Percentages are approximate. 

• Median values used are the arithmetical averages of the central 2 or 3 items and are shown without 
parentheses; arithmetical means are shown in parentheses. Where 1 man was not clearly the executive 
head of a company the average of the cou.bination of men which appeared to hold that position is used. 
The titles of the executive heads vary. Usually it is the chairman or the president or those two combined. 
In 1 case, however, it was the executive vice president, though he has been subsequently made president. 
The men are those that held the top positions when Moody's Annuals for 1939 went to press. Changes 
since then are not incorporated in this table. 

• The 2 heads of railroads included here were brought from the presidencies of other, smaller railroads. 

Age upon appointment is probably more important than that at a 
given date because the executive who has served for some time has 
the advantage of experience in the job to balance against the handi- 
caps of his advancing years. Current age, however,, is interesting. 
For example, the executives as a group were approximately 61 years 
old in 1939. Again there were rather wide variations. Only 1 was 
younger than 45 and 3 younger than 50 ; at the other extreme 4 were 
70 or more. Half were 60.7 years old (the median) or more; 10 were 
'65 or over. Since the retirement age in many companies is 65 this 
indicates that a fairly large proportion had passed the point which, 
according to many corporation officials, should mark the cessation of 
active dominant executive direction, unless rather exceptional cir- 
cumstances interveub. 

The age tendencies are not at all alike among the 3 corporate 
groups which were examined. The picture for the industrials, for 
example, is quite similar to that of the 35 corporations considered as 
a whole. The averages and the dispersions are about the same for 
both. The utilities and the railroads, however, present a different 
picture. Thus, the largest utilities have chief executives who were 
appointed when they were 4 or 5 years younger than was usual for 
the 35 corporations, and their present age is likewise about 4 years 
below that of the group average, 

» One of these was retired late in 1939 after having served for 4 years. The other was appointed more 
reoently and is still In office. 



OONCENTRATION OF EXX)NOMIC POWER 47 

The railroads, on the other hand, are run by substantially older men. 
The usual appointment age here is some 5 years higher than for all of 
the 35 corporations; the age in 1939 was 1.3 to 3.6 years above the 
average for the larger group, depending upon whether the median or 
the arithmetic mean is considered. The belief that bureaucracy in 
railroad management is partly due to the relatively advanced years 
of railroad executives seems to be substantiated by these data. The 
unprogressiveness of railroad management in service, pricing, and 
operational policies may well be due to some extent to the decreased 
mental and physical vigor of those at the top, although doubtless 
there is more than this in the picture as a whole. 

A question which should be raised, however, is how the relative 
youth^of the top executives of the utilities affects bureaucracy in 
those companies compared to its prevalence in the railroads. Although 
we are not prepared to give a complete answer, it does appear that 
the improgressiveness and unaggressiveness of the utilities are more in 
their pricing and other marketing policies and practices than in their 
operational and administrative aspects; while among the railroads the 
ills of bureaucracy extend to these latter activities as well as the 
former. 

There is no group of positions in the Federal Government which 
strictly com.pares with the presidencies of the giant corporations. The 
nature and variety of the tasks of some of the top governmental offi- 
cials are both different and m.ore complex than those faced by corpora- 
tion executives. There is no other job in the Natsion, for example, 
which can com.pare in variety of problem.s with that of the Presidency. 
Much m^ore than adm.inistrative ability is required if the position is 
properly filled. The President must be in tune with the voters of the 
Nation — who are more effective than stockholders because a choice in 
leadership is offered them. — as well as plan for their welfare and for the 
Nation's place in the world. The departmental heads, in addition to 
their administrative tasks, assist the President in his political and 
policy-determining functions and are in turn aided by their immediate 
subordinates. There is a fairly rapid turn-over at each of these three 
levels. One must drop to the level of the bureau- chief, therefore, to 
find men whose work parallels that of the corporation president, though 
they must work under the political heads we have mentioned. In 
speaking of these men Lewis Meriam comments : 

Governmental activities are such that these permanent offices often have the 
developmental, expansive side which in private enterprise may be the strength 
of the top executives. One may indeed raise the question whether a bureau 
chief with his upper civil servant assistants is not more comparably^ with a cor- 
poration executive than is the President of the United States.^ 

Despite the limitations, however, we may make some rough com- 
parisons of these upper-level groups. Tables XI to XIV present some 
summary age data on the Presidency and the three next subordinate 
levels in Federal administration. 

Table XI shows that on the average our last eight Presidents have 
assumed office at the age of little more than 54 years. 

« L. Meriam and L. F. Schmeckebier, Reorganization of the National Government (Washington: 
Brookings Institution, 19391, p. 75. It should be remembered, however, that Meriam is a believer in the 
decentralized type of Federal administration and thus may have a tendency to overemphasize the bureaus. 



48 



CONCENTRATION OF ECONOMIC POWER 
Table XI. — 8 most recent Presidents of the United States 

Median ' 



Age at assumptionofoflB.ee 54.1 54.5 

Length of term 2. - 5-4 5.6 

Years in governmental positions prior to assumption of ofllce 14. 9 16. 

Source: 

State Governor percent.. 

Succeeded from Vice Presidency * - do 

Head of a Federal department do 

Senator - -- do 




« The median used here is the average of the 2 central items. 
» Includes 7 years of the term of Franklin D. Roosevelt. 

This is about 4 years older than the usual age at which the executive 
heads of the 35 giant corporations assumed their top positions. It 
is about the same as the average for the railroad group. The brevity 
of Presidential tenure, however, makes the average age at which a 
President leaves office about equal to the average current age of 
the corporation presidents. This current age may be considered 
as lying somewhere near the midpoint of the composite terms of 
office; thus the average retirement age for corporation executives is 
several years beyond this. The average age of Presidents, then, mid- 
way in their terms of office, is slightly below the corresponding average 
for the top executives of the largest corporations. 

The 15 governmental executives who head the 10 Federal depart- 
ments and 5 other large administrative units were appointed to office 
at almost the same age as the average for the heads of corporations. 
This is shown in table XII. Their current ages, however, are about 
5 years below the corporation average and are also slightly below the 
average of the utility group. 

Table XII. — Executive heads of the 10 departments and 5 other large agencies of the 
Federal Government, December 19S9 * 



Median * 



Age at appointment 

Current age..".. 

Years in governmental positions - 

Source: 

Promotions from within the Federal adrninistration 3 .percent. - 

Other governmental or political positions.. do — 

Nonpolitical positions do 




48.7 
61.0 
8.7 



' The five agencies included are: Federal Loan Agency, Federal Security A.gency, Federal Works Agency, 
Government Printing OflTice, and Veterans' Administration. 
2 The median figure used is the average of the central 3 items. 
' For example, 3 secretaries were formerly under secretary or assistant secretaries. 

The under secretaries and assistant secretaries over a period of 
years have followed this general pattern at a slightly younger level. 
Thus, at the time of appointment tuey have been from 1 to 4 years 
younger than the secretaries we have examined. Their age levels at 
any given time, of course, would naturally lie correspondingly below 
those of the secretaries because their terms of office are roughly com- 
parable. A summary of the data concerning this group is given in 
table XIII. 



CONCENTRATION OF ECONOMIC POWER 49 

Table XIII. — Under secretaries and assistant secretaries > 



Arithmetic 
mean 



Median 



Age at appointment 

Average tenure (months). 



46.9 
51.4 



47.5 
34.5 



1 Adapted from A. W. Macmahon and J. D. Millett, Federal Administrators (New York: Columbia 
University Press, 1939), p. 296. The items given here are averages of the averages for past and present 
incumbents of the 24 specific posts listed on the page indicated. 

At the bureau level this trend toward younger men is at least 
temporarily halted, although the age level still lies below that of the 
corporation executives. This is briefly indicated in table XIV. 

Table XIV. — 62 bureau heads * 

Average age at appointment 48 

Average age in 1938 53. 6 

Source: 

Percent 

Recruited under formal merit systems ._ 48 

Unrestricted: 

Promoted from within national administration 23. 

Taken from state or local service, or from cognate semipublic 

background 19 

Political recruitment 10 

1 Adapted from A. W. Macmahon and J. D. MDlett, Federal Administrators (New York: Columbia 
University Press, 1939), p. 454. 

The 62 bureau chiefs in office in 1938 were appointed at an average 
age of 48, and their current age at that date was 53.6 years. This is 
almost the same as the ages which obtained in the affected depart- 
ments 12 years earlier, which indicates a rather settled policy in 
regard to the ages of bureau chiefs.^ The corporation executives 
were appointed to their positions when they were about 2 years older 
than were the bureau chiefs, and their current age is about 7 years 
beyond that of the Government oflicials. 

Insofar as direct comparisons are possible, the following may be 
said in summary: the appointment age of the top officials of the 
Nation's largest corporations is about the same or slightly above that 
of the top layers of Government officials. The average current age, 
however, is considerably higher than that of Government officials. 
To the extent that the undesirable aspects of bureaucracy are due to 
the advanced years of some of the top executives, it is apparent that 
this cause exists in the large corporation to at least the same degree 
if not more than it does in Government. 

The second aspect of executive leadership is broadness of outlook. 
In even a moderately large corporation the administrative problems 
are many and diverse. The executive must be capable of harmonizing 
a multitude of conflicting forces. In the giant corporation, therefore, 
the ability to see things broadly. and in relation is correspondingly 
more essential. Since most of the heads of the largest companies are 
promoted from within ^ the question should be raised as to whether 
broad-gage executives can readily be developed in such enterprises, 

' Of. A. W. Macmahon and J. D. Millett, Federal Administrators (New York: Columbia University 
Press, 1939), p. 454. 
» See Table X. 



50 CONCENTRATION OF ECONOMIC POWER 

A number of executives believe that the large corporation develops 
outstanding executives with considerable difficulty. The head of 
one company went so far as to say that "large corporations do not 
produce great executives. The men tend to become too specialized. 
The man in a smaller organization gets to know the business as a 
whole at an earlier age." Another phrases the problem in this way: 
"Specialization results in a dearth of top executives. You can't 
find men to integrate because they themselves aren't integrated. I 
know more good all-around business men in small concerns than I do 
in big corporations." Or again, "As activities become more special- 
ized and routinized it becomes more difficult to develop ability in the 
ranks. * * * j^ jjja^y j^q^ j^g gg^fg fQp ^g ^q yq\j upon securing a 

sufficient number from the ranks who will qualify for executive 
leadership," ^ 

The benefits of specialization, of course, constitute one of the prin- 
cipal advantages of the large corporation and can ill be sacrificed. 
Although some top executives demonstrate that specialization is not 
an insuperable barrier in the development of leaders, nevertheless it 
remains an impediment in the process of such development and is, 
therefore, a contributing cause of bureaucracy in big business. 

In the Federal Government the bureau chiefs are probably specialized 
to about the same degree as the corporation executives. Among the 
higher political heads, however, there is a characteristically broader 
experience and outlook. It is the business oi the pohtician to compose 
differences and to recognize the implications of particular policies 
over a broad realm. To the extent, then, that specialization is a 
cause of bureaucracy, the large corporation suffers as much as and 
perhaps more than Government. 

The third general requirem.ent for good leadership is that the 
executive shall have reached his position on the basis of m&rit. The 
degree to which m.erit now plays a part in appointments is difficult to 
determine. With the diffusion of ownership, which is characteristic' 
of the large corporation, there is a corresponding decline in the practice 
of placing the chief owner or his son or some other relative in the 
higher executive positions. Although the propensity to "play ball" 
with the existing control is doubless a factor in the selection of 
executives, this relative disappearance of inheritance as a selector 
opens the way for an emphasis on merit per se and it is possible that 
this will be the future trend. Inheritance is too unreliable a deter- 
minant for us to weep over its eclipse. 

Although merit has doubtless played an increasingly important 
part in the selection of the top executives of large corporations, one 
nevertheless hears the complaint, from other than those who may be 
expected to be prejudiced, that seniority has been too m.uch empha- 
sized. This Is particularly true, for example, among the railroads and 
doubtless contributes to the relatively high age at which men in this 
field are appointed to top positions. The idea of prom.otion by 
seniority permeates the railroads all the way down the hierarchy, 
where men are apt to think more in terro.s of the time in their records 
than in how effectively that time has been spent. 

But promotion by seniority is not confined to the railroads. Some 
executives feel that the practice is generally characteristic of the large 

» James O. McKinsey, Organization Problems Under Present Conditions (New York: American Mun- 
agement Association, 1936), General Management Scries No. 127, p. 13. The late Mr. McKinsej 
chairman of the boards of Marshall Field and Co. and of the American Management Association. 



J 



CX)NCENTRATION OF EJOONOMIO POWER 51 

corporation. Moreover, even if it were no naore common there than 
in the small enterprise, the process of reaching the top would take 
longer because of the greater number of steps in the hierarchy. In 
any case, it is at least certain that the big companies as a rule do not 
have an adequate system of executive recruitment. In regard to 
this lack, Edward R. Stettinius, Jr., for exam.ple, believes that a method 
of inventories should be developed whereby just as exact a record 
could be kept of executive material as now exists for other m.aterials.^° 
Some of the largest com.panies are now engaged in developing the first 
stages of rating systems and refined records to assist in uncovering 
executive talent and in advancing it rapidly enough to bo really 
effective. But such methods are relatively difficult to operate and do 
not enjoy wide acceptance in big business. On the other hand 
seniority is so easy a method to apply that in the lack of a better one 
it is natural that it should be used. Seniority is one of the few things 
about an executive that can be accurately and objectively deter- 
mined. Those who are passed over cannot com.plain that on the 
basis of selection used they should have been advanced instead. 
Nevertheless, length of service does not guarantee the requisite 
qualities of a leader. It is essential, therefore, that other methods 
of rewarding such devotion be discovered and used so that leadership 
will not be sacrificed on the altar of convenience and in a way that 
is of doubtful benefit to employee morale. 

Seniority, of course, is also used in public adjninistration as a basis 
of promotion. We do not, however, have available m,aterial to 
indicate the extent to which this method is employed. Nevertheless, 
since the average ages of the top officers at the time of appointment, 
both in 'governm.ent and in private enterprise, are not widely diver- 
gent, there is at least an indirect indication that prom,otion by seniority 
is no more prevalent in one instance than in the other. 

In their study of Federal administrators, Macmahon and Millett 
m.ake their priro.e dichotom.y of the bases of selection that of a division 
into political and nonpolitical criteria. Among the bureau chiefs they 
found that only about 10 percent were examples of primarily political 
recruitment.'^ The extent to which seniority played a part in the 
selection of the other 90 percent we are not prepared definitely to say. 
A general knowledge of civil-service procedure, however, indicates 
that seniority is clearly a factor in prom.otion under that system 
because the experience which a candidate has to his credit is often 
given substantial weight. On the other hand, since bureau chiefs are 
appointed at an average age of about 48 and since turn-over of Govern- 
ment em.ployees at the lower levels is generally below that of industry, 
there is indirect evidence that, com.paratively, seniority controls no 
more and perhapg even less than in large corporations. 

In regard to the Assistant Secretaries, Macmahon and Millett cite 
a num.ber of exam.ples where appointment was clearly on the basis of 
merit, although on the whole they conclude th^t "haphazard political 
considerations have been the outstanding factors" in the selection of 
these m.en. They do comment, however, that am.ong them "there 
has been a marked prevalance of college graduates." '^ The preceding 
positions of the current departmental Secretaries and the last eight 

" Edward R. Stettinius, Jr. "The Selection of Executives," Management Review, XXV (November 
5936). pp. 332-333. 
II see table XIV. 
"Macmahon and Millett, op. cit., pp. 290, 294. 



52 CONCENTRATION OF ECONOMIC POWER 

Presidents indicate that the great proportion came from jobs which in 
relation to their present rank may be classified roughly as analagous 
to "operating vice president" or "assistant to the president" in 
corporations.^^ In business these posts are commonly springboards 
to the top. 

On the whole, then, we cannot say that merit for the particular 
jobs to be done is given any less consideration in government than 
in business. Politics, of course, plays a part in both. As one execu- 
tive expressed it: "Politics exists in all large corporations. Whenever 
there is a change at the top in our company there is a shake-up all 
along, the line." There is much room for improvement in both 
business and government, and, in each, some of the policies of 
» executive recruitment result in defective leadership and contribute to 
bureaucracy. 

The fourth qualification for leadership is that the executive remain 
in office long enough to be effective. Just what this term may be is 
difficult to say. Some executives claim that "a creative man delivers 
all he has in 3 to 5 years on one job." While this may be true at some 
of the lower levels of the hierarchy we doubt that it accurately 
describes the situation at the top. A well-conceived program of 
action would require 3 to 5 years to be properly developed and put 
into operation. ' An even longer period would be required' for it to 
becom.e an integrated part of the enterprise as a whole. Continuity 
of office is essential to smooth continuity of policy. Our general 
conclusion, therefore, is that although the exact length of appointment 
cannot accurately be determ.ined, 10 years is not too long for a capable 
man to direct an enterprise while even 3 years is too long for a poor 
one. The problem is to select well and then to allow a sufficient length 
of time for the executive leader fully to put his ideas into effect. 

Ih general, the top executives of the largest corporations have terms 
of office that are satisfactorily long. Table X indicates that , the 
present incumbents, on the average, have held office for 10 or 11 years. 
Since this measure is taken in the midst of their terms we may suppose 
that the total, on the average, will be somewhat longer. If the 
sample were entirely representative both as to tim.e, in relation to say, 
the business cycle, and as to coverage of variation am,ong corporations, 
the average term, would be approximately twice that of the time already 
served. In spite of such im.perfections as the sample undoubtedly 
has, we m.ay safely' suppose, therefore, that the 'average term is at 
least 5 years longer than the elapsed part of it, which would indicate a 
minimum, average for top executives of about 15 years. The average 
term for the railroad executives would be something less than this 
because of their more advanced age. This assumption is supported 
by the smaller elapsed time which current railroad executives have 
served. These m.en, as shown in table X, have been in office from 
7 to 9 years while the average for utility and industrial executives is 
from 9" to 12 years. Thus, for the group as a whole there appears to 
be a healthy" continuity of office,^* although individual variations are 
wide, of course, and some executives remain after senility overtakes 
them. In general, however, the picture is favorable. 

1' See tables XI and XII. 

'< While some persons believe that a relatively long term of office is an undesirable attribute of bureaucracy 
we do not subscribe to that notion. A rapid turn-over may bring more beaucratic chaos than it does desir- 
able change. 



OONCEIN'TRATION OF ECONOMIC POWER 53 

Public administration presents a somewhat different state of affairs, 
though again there are wide variations. The average tenure of bureau 
chiefs seems to be fairly constant. As we have noted, the average 
appointm.ent and current ages were about the same for both 1926 and 
1938. Because of this stability we are justified in doubhng the average 
elapsed period of service in order to obtain a rough estimate of the 
average total term. Since the average elapsed period of service in 
1938 was 5.6 years the total term.s would run about 11 years. While 
this is not as long as the average terms of the top corporation execu- 
tives, it m.ay be considered satisfactory. 

Above the bureau level, however, the holders -of public office are 
m.uch m.ore volatile as to tenure. Thus, the average term, for Secre- 
taries, Under Secretaries, and Assistant Secretaries is only 3 to 5 years. 
The average period of service for our last eight Presidents and for all 
our Presidents combined has been about 5 years. Whatever the 
political m.erits of rapid turn-over, they are largely demerits when 
viewed from, an administrative standpoint. 

Walter Sharp saw in the transitoriness of the French Cabinet one 
of the prime causes of bureaucratic inefficiency in that nation's 
government.'® We are more fortunate in the United States, for it is 
an unusual French Cabinet that lasts more than a year. However, 
we do not wholly escape the problem. Thus, in his blast against 
governmental bureaucracy in the United States, James Beck stated 
that "the heads of departments and their Assistant Secretaries hold 
office for comparatively short periods of time and they cannot during 
such short periods become familiar with all the duties of their depart- 
ments — certainly not of the more technical phases of such duties. 
The consequence is that the heads of departments make nearly, if 
not all, of the decisions in name only, while the case is actually devel- 
oped * * * [by] a subordinate in the department." '^ President 
Taft believ.ed that the shdrt terms of the -top departmental officials 
had the result that "for a year and a half, at least, sometimes for a 
longer period, it throws the administration of the department into the 
complete control of minor subordinates." " These may be over- 
statements for purposes of emphasis but they indicate an actual -prob- 
lem. Of course, a somewhat similar difficulty exists when a new cor- 
poration president takes office, but his relatively longer term means 
that such periods of poor coordination need less frequently occur. ' 

Thus, on the basis of turn-over of leadership, big business compares 
favorably with Government. Both business executives and bureau 
chiefs have quite satisfactory terms of office. Above the bureau level, 
however, turn-over is generally, more rapid — too rapid, in fact, for 
effective administration. 

Finally we should mention briefly the ability of the two groups to 
attract executive talent. Three elements may be mentioned: Salary, 
security, and prest^e. Annual salaries of over a hundred thousand 
dollars for the top men are common among the largest corporations, 
though of course there are variations. Since most top executives have 
risen within their companies, however, and there is little cross-over 
among companies, the variations do not result in a flow of executive tal- 

" Walter R. Sharp, French Civil Service: Bureaucracy in Transition (New York: Macmillan, 1931), 
p. 33. 
" James M. Beck, Our Wonderlan.d of Bureaucracy (New York: Macmillan, 1932), p. 173. 
" Quoted in ibid., p. 121. 



54 CONCENTRATION OF ECONOMIC POWER 

ent to those paying the highest salaries. Remuneration schedules ap« 
pear to be at least sufficient to make the top positions attractive from 
that angle to subordinate executives within particular concerns — which 
is about all that matters in practice, except perhaps in the case of the 
railroads where there is some transfer among them. 

Judging from the length of service of the top executives of the larg- 
est corporations, security of tenure at that level at least would also 
seem to be adequate. Likewise the position of head of one of the large 
corporations carries with it a good deal of prestige in the corporate 
family and is therefore an inviting goal. 

In comparison with business, government is generally less attrac- 
tive from the standpoints of salary and security for men at the top 
. levels. In all of government there is no salary of a hundred thousand 
dollars. The term of office of those above the bureau level is also con- 
siderably shorter than that which obtains in the largest corporations. 
In regard to the element of prestige, however, the situation is different, 
for identification with the public service has always appealed to men 
and in recent years this attraction has considerably increased due in 
large part to the expanding role of government in modern life. 

In summary, therefore, it may be said that business leadership often 
contributes to bureaucracy because of defects in regard to age, narrow- 
ness of outlook, and the too frequent resort to seniority in making pro- 
motions. The rate of turnover among the top business executives of 
the largest corporations is small — in fact, so small that complaints 
are sometimes made of stoppage at the top. In comparison with 
business, Government executives are no older, they probably have a 
broader outlook, and seniority has been less important in appoint- 
ments above the bureau level, while tenure, at this point, on the other 
hand, has been relatively short. The prestige attached to the top 
governmental positions has been as great as that of the top business 
positions for the past decade and wUl probably continue to be high, 
though the attractiveness of salary and tenure are somewhat below 
the level of the major positions in big business. In short, the defects 
of leadership contributing to bureaucracy bulk about as large in busi- 
ness as they do, in Government. 

A low level of morale. — In addition to effective leadership, a prime 
requisite of a live, responsive, unbureaucratic enterprise is a high level 
of morale on the part of its employees. High morale is due to a num- 
her of factors, even a cursory examination of which would take us too" 
far afield. Some of the more important, however, may^be mentioned. 
These are adequate wages, reasonable hours, good working conditions, 
a degree of job security, some possibility of promotion, fair, non- 
disfcriminatory treatment, and a psychological identification with the 
company or a part of it. 

The adequacy of remuneration is difficult if not impossible to deter- 
mine on an absolute scale. Many so-called necessities today were 
luxuries or entirely unknown yesterday. On a comparative basis, 
however, the position of the giant corporations may be stated. Thus, 
in general, the nation's largest companies pay wages and salaries and 
allow vacations, and the like on a somewhat more liberal plane than 
do the small cpmpanies in their respective industries. On the other 
hand, there is little general difference with regard to hours.'* 

" Our observations and the statements of the executives of large companies on these points are buttressed 
by a number of reports on specific industries which have been issued by the United States Bureau of Labor 
Statistics and by a summary report of these data in process of preparation by that Bureau for submission to 
ihe Temporary National Economic Committee. 



CONCENTRATION OF ECONOMIC POWER 55 

Working conditions in the largest concerns appear as a rule to be 
above those found in the smaller companies. Likewise, job security 
seems more stable, though there are wide fluctuations among indus- 
tries. Pension and other benefit plans are also more characteristic of 
the large companies, though the social security movement is strong 
testimony to the inadequacy of industry's care of its workers in their 
old age. 

In the matter of discrimination, various classification . systems — 
Avhereby equal pay for equal work is reasonably well guaranteed — are 
•probably more widely used in "the large than in the small corporation, 
though they have not been carried to any degree of refinement in either 
<;ase. Allegedly unjust treatment growing out of interpersonal rela- 
tionships is probabl}^ no more prevalent in one group than in the other, 
though individual concerns vary widely in the efi'ectiveness of their 
personnel policies on this point. 

As for the possibility of promotion, the large corporation offers a 
longer road but a larger reward at the end, while in the smaller con- 
cern an individual may get to the t-op more quickly because there are 
fewer intervening stages. However, it is widely recognized that sub- 
stantial opportunity for promotion does not exist for a large propor- 
tion of the workers in either case. There simply would not be enough 
supervisory jobs to go around if all employees were capable of holding 
such positions. Most of them, therefore, must look foi'ward to remain- 
ing more or less at their current levels despite the havoc this may visit 
upon the American tradition of "getting ahead." Nevertheless, many 
executives of the lai"ge corporations recognize the deficiencies of their 
means of uncovering talent soon enough to set such men on the road 
to advancement. Revised systems pointing toward this objective are 
being developed in a few of the big doncerns; the smaller ones rely 
largely on personal, informal methods of identifying and promoting 
potential executives. 

Finally, an active psychological identification with thv company on 
the part of the employee is of great value in maintaming morale. A 
-corporation executive has remarked, for example, that his company — 

has always had a loyal and enthusiastic organization. How is this done? In 
the first place, employees are very early indoctrinated. The new employee is 
given a pamphlet telling about the history of the company, its principles, and 
its heroes. Then, too, many of the employees are stockholders. This gives them 
a big interest. Finally, the company has been able to sell the corporate myth — 
it is honest; it takes care of its own; we are all one big family; we are the biggest 
and best in the field. 

In like manner the slogan "The message must get through," together 
with its supporting examples where difficulties were surmounted, is a 
powerful symbol by which to keep up morale in a telephone company. 
The large corporation, however, works under handicaps when it seeks 
to have all of its employees positively identified with it. So much 
that touches the employee is impersonal, and identification is largely 
a personal matter. The result is that much of the employee identifi- 
■cation that exists is chiefly with small groups within the enterprise. 
T. N. Wliitehead argues that — 

in spite of endless talk about the value of "esprit de corps," "morale," and the 
iike, many executives become visibly uneasy when this sentiment begins to build 
up in the only way possible to it. What is asked of the ■worlie*'is *-vivid loyalty 
to some high abstraction variously referred to as "Company polioy," "The fitm," 
■or even "The principles for which we stand. 

258325 — 40 — No. 11 5 



5g CONCENTRATION OF ECONOMIC POWER 

v 

But loyalty is a social sentiment and it is built on routine collaboration, start 
ing with quite small groups within the structure, and gradually spreading out- 
ward as these groups being to integrate among themselves. The progress of 
loyalty is from small to larger associations; this is the story of American federal- 
ization; it represents the historical growth of most large companies, and it is the 
story of integration in any wide association of human beings.'? 

This tendency of loyalties to small groups is no doubt partly respon- 
sible for the development of cliques of which so many executives com- 
plain. The problem of extending such narrow loyalties to broader 
spheres is a task of management which is far from solved in the big 
corporation. 

Perhaps the best single, over-all indication of the level of morale in 
an enterprise is the rate of turnover among its employees. It is the 
replacement figure that is especially important here because in large 
part this represents either dissatisfaction* with the company on the 
part of the employee or on the part of the employer with the worker. 
Separations or accessions alone may be too greatly influenced by 
changes in the condition of business to be a reliable indication of the 
level of morale. ^° Some seasonal industries, of course, show a high 
rate of separations and accessions over a period of a year, but this 
neo^nS-t necessarily mean that morale is low. In fact, it may well 
be fjHrly high if wages are adequate on an annual basis and the work- 
ers are. fairly sure of being rehised. Use of the replacerhent rate helps 
to uncos^er such conditions. ^^ 

Data are available from which a rough indication of the replacement 
rates in both "small and large business may be obtained. The raw 
figures relate to whole industries and are confined to-monthly charges. 
Changes with a cycle shorter than a month or for particular concerns 
are not shown. Such replacement rates for 20 large, separate indus- 
tries and for 144 manufacturing industries combined are shown in 
tables XV and XVI. ' 

i» T. N. Whitehead, "Leadership Within Industrial Organizations," Harvard Business Review, XIV 
Winter, 1936), p. 164. See also his Leadership in a Free Society (Cambridge, Mass.: Harvard University 
Press, 1936). 

2" It must be acknowledged, however, that in the declining phase of the cycle wholesale separations 
doubtless have a bad effect upon morale. Everyone wonders whether or not he is next. 

" The replacement rate is the ratio of . separations or accessions, whichever is the smaller, to average 
pay roll. This sho^s the extent to which men hired are taken on to replace men who have left t e com- 
pany. During a period when men were being added but none were being ISiid ofl, the nphic i t rate 
would be zero. Using the accession rate as a turnover indication of morale would give an erroneous 
impression of morale. 



I 



OONCENTRATION OF ECONOMIC POWER 



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58 CONCENTRATION OF ECONOMIC POWER 

Table XVI. — Replacement of industrial personnel for 1938 



Median » ! ^'i^i"'^,"<' 
mean ' 



10 large relatively concpntrated industries * I 27.76 | 32.48 

10 large relatively uneoncentrated industries * j 45.89 1 44.60 

20 industries combined _ 35.70 I •38.54 



Replacement rate for 144 industries '. 



1 Based on data published in the Monthly Labor Review, May 1938-March 1939. The selected portions 
of these data for 20 industries arc given in table XV. 

' The median value here used is the average of the rates of the 2 central industries. 

' The mean used here is the arithmetical avernge of the average rates for the industries. Xo adjustment 
Is made for size of industry, though all employ more than 25,000 persons. 

* An industry is classified as concentrated if the 4 largest enterprises of industries employing more than 
100,000 persons produce over 25 percent of the total output or if the 4 largest enterprises in those industries 
employing 25,000 to 100,000 persons produce over 35 percent. By inference this gives us a rough measure of 
the size of the concerns involved and provides a basis for comparing turn-over ratio in large and small concerns. 

The 10 industries classified as concentrated are automobiles and bodies, automobile parts, boots and shoes, 
cigars and cigarettes, electrical m&chinery, iron and steel, petroleum refining, rayon, rubber tires, and 
slaughtering and meal packing. The 10 unconcentratod industries are brick, tile, and terra cotta, cotton 
minufacturing, furniture, foundries and machine shops, hardware, knit goods, rqen's clothing, radios and" 
phonographs, sawmills, and woolen and worsted goods. Pee chart 1, supra, faring p. 5. 

• This is a very rough figure derived by taking the monthly tola! accession, or separation rate, whichever 
is the lesser in a given month, and totaling the 12 items. The total accession rate for the 144 industries was 
46.20 percent of average pay roll, and the total separation rate was 49.20. The replacement rate is of course 
smaller because it tends to eliminate the effects of pay roll fluctuations of cycles longer than 1 month. 

We have divided these large industries into 2 groups of 10 each; 1 
includes in general the large and the other the relativel}^ small con- 
cerns. The dividing line is, of course, dim and arbitrary. We have 
then assumed that the combined turn-over rates for the industries 
that are characterized by large concerns are typical for large com- 
panies. Likewise, the rates for those characterized by small concerns 
indicate the rates for small companies. We recognize that variations 
may be wide in individual cases but we believe. that comparisons 
between the two groups are rouglily valid. 

On this basis the rate of replacements for small concerns appears 
to be about half again as large as the rate for large ones, the respective 
percentages being roughly 45 and 30. Thus, even without the effect 
of business cycles the average employee remains with the average 
company only about 3 years. He stays somewhat longer, however, 
in the large enterprise than he does in. the small one. Rough as these 
figures are, we feel justified in basing upon them the conclusion that, 
judged by this ci'iterion alone, the level of morale in large companies 
is at least as high as in small ones and that in all probability it is some- 
what higher. Apparently the large companies have more than com- 
pensated for the handicap of impersonal size. This is of course rela- 
tive to the level of morale attained by small concerns; it is clear that 
both groups have much room for improvement. 

Before leaving for the moment this condensed examination of 
morale, a few brief comparisons should be made with government. In 
regard to the factors of nondiscriminatory treatment, good working 
conditions, reasonable hours, and adequate wages, government is 
equal to the level of the more advanced private enterprises and is 
considerably above the general average for employees up to the $2,000- 
$3,000 level. Beyond this, however, private employment pays pro- 
gressively higher salaries. ^^ Employee identification in government 
is probably also on as high a plane as that attained by private industry. 
Regarding the possibilities of promotion, however, there are some dis- 

" Cf. U. S. Personal Classification Board, Closing Report of Wage and Personnel Survey (Washington; 
Qovemment Printing Office, 1931), pp. 114-120, 243. 



OONCENTRATION OF ECONOMIC POWER 59 

crepanies, for advancement is probably more regular and certain in 
the civil service, tbough it is limited enough in either case. In those 
places "where the lightning strikes," of course, advancement may be 
more rapid and more extended in the large corporation. On the score 
of security the civil, servant has clearly the more advantageous posi- 
tion, though advances along tbis line are being made by many of the 
large corporations. Pow(M'riil incentives for effective work and high 
morale are not lacking in th(i public service, for patriotism and altru- 
ism, together witli pride of craftsmanship and a good job well done 
operate with particuliu' force in government,^^ 

The effect of llir.se factors on the replacement rate in government 
is indicated in liibles XVII and XVIII. The rather large- sample of 
Federal cniployeos hero examined doubtless has its inadequacies but 
it should b(> reasonably reliable in portraying the general situation.^^ 
The annual replacement rate is from 13 to 16 percent for the 2-year 
period ending June 30, 1938. In other words, barring general shifts 
in the size of the various agencies, the average employee remains in 
the s(;rvice for a period of about 7 years. Obviously one cannot say 
that morale in the Federal service is therefore about twice as high as 
in the large corporations. The element of security is probably given 
too much weight in these turnover figures to permit their use as accu- 
rate and absolute indicators of morale. Moreover, morale itself can 
scarcely be measured- in quantitative terms. We do believe, however, 
that the replacement rates indicate that it is at least as high in the 
Federal service as in the large corporations. Individual concerns, of 
course, may have a higher level, but we doubt that this is true for 
the group as a whole. 

" Sec Marshall E. Dimock, "The Potential Incentives of Public Employment," American Political Science 
Review, XXVII (August 1933), pp. 628-636. 

'" For one thing, no monthly break-down of the data is made, as was possible with the industrial data. 
However, the relative stability of Federal employment tends to make the resulting distortion quite small. 
Moreover, we are here able to examine separate agencies while the industrial data were for whole industries. 
Fortunately, the tendency of error appears to be in the same general direction for both groups, which in- 
creases the validity of comparisons. 



60 



CONCENTRATION OF ECONOMIC POWER 



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Table XVIII. — Replacement rates of Federal service personnel i 



Total average number on pay rolls of reporting agencies-.. 520, 259 

Gross replacements 2. - 88,915 

Gross leplacements less indicated trai.'fer? 84,890 

Replacements adjusted by subtracting^ lai r transfer number 

from gross replacements ' _. 1 81,434 

Total net replacements for individual agencies * 78,997 



Year ending June 
30, 1938 



Number 



Percent 

of average 

pay roll 



100. 00 
17.09 
16.32 

15.65 
15.18 



Year ending June 
30, 1937 



Number 



527, 535 
78, 051 
71, 736 



Percent 

of average 

pay roll 



100. 00 
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13.60 

13.60' 
13.08 



' Compiled from data in table XVII. 

2 Whichever is the lesser of total appointments or total separations. 

3 Since the reporting agencies indicated more accessions than separations by transfer for each year, the 
larger figure is used here to indicate actual transfers. The assumption is made that the discrepancies in- 
volved' are caused by omissions in indicating that particular transfers have taken place. 

* The total replacements indicated here are derived by ascertaining the replacements (whichever is the 
lesser of appointments or separations) which occurred in each reporting agency and totaling the items. 
Transfers are not subtracted because they refer to interagency movements and do not necessarily affect 
intra-ggency turn-over. • 

Habit and inertia. — A third personnel cause of bureaucracy — in ad- 
dition to the shortcomings of leadership and a low level of morale — is 
the influence of habit and inertia. Obviously the world could not go 
on without .habit. If all decisions had to be remade every day the 
human race would become extinct. Habitual responses are particu- 
larly important in complex organizations such as large corporations. 
Only the broadest of decisions and directions can be made from the 
top. A high executive cannot be expected to know all the details in 
his enterpi^ise, including those of the machinery whereby response to 
decisions or orders is obtained. He must know what strings to pull 
or what buttons to push in order to get the desired results. Beyond 
that he must depend largely upon the habitual responses of the 
organization which have been built up over a period of years. 

Once a system of habits has been developed and put in motion, 
however, its inertia is tremendous. It is not easily diverted from its 
course. Speaking from his rather broad experience, the late James 
O. McKinsey has said: 

One of the dominant characteristics of human nature is the inertia to change. 
As a consequence, the majority has always resisted change, and even when changes 
become inevitable, it has sought to retard their accomplishment as much as possi- 
ble. Consequently, changes in industrial operations and in economic methods 
have been effected very slowly during most of our industrial history. * * * 
Occasionally an executive has departed from the established custom and achieved 
success by being original; most of those who attempted to do this, however, have 
failed, and, consequently, most executives have come to believe it the wiser 
policy to follow the accepted routine. 

When a major economic upheaval has occurred executives trained in the 
habi'tual method of thinking have not been able to adjust themselves to the new 
order and a new generation of leaders has been developed.^^ 

"There is no pain like the pain of a new idea" is another way of 
expressing the tenacity of habit and the comfort which it brings. 
When one adds to these qualities the fact that fixed ways of doing 
things result in vested interests among the performers, the importance 
of habit as a rigidifying influence becomes more apparent. Not only 

» James O. McKinsey, Organization Problems Under Present C onditions, p. 6. A corporation executive 
has somewhat cyincally observed, "You can't change tti- thinking of our executives. Logic won't do it, 
the depres.-ion didn't, labor won't. There's only one thing to do: let them die otl or get rid of them." 
While we think that this official doubtless was exaggerating, nevertheless his experience and resultant atti- 
tude indicate the existen.ie of a pressing problem. 



CONCENTRATION OF ECONOMIC POWER g,3 

do men resist change because they do not want to be mentally dis- 
turbed, but also because their skiUs may be less valuable under new 
methods. The much maligned Machiavelli pointed out centuries ago: 

It ought to be remembered that there is nothing more difficult to take in hand, 
more perilous to conduct, or more uncertain in its success, than to take the lead 
in the introduction of a new order of things. Because the innovator has for his 
enemies all those who have done well under the old conditions, and lukewarm 
defenders in those who may do weU under the new.^' 

The effect of habit is probably nowhere better illustrated than in-, 
the pricing and "merchandising" of railroad passenger traffic. Some 
western and southern railroads demonstrated several years ago that 
low rates, comfortable equipment, and rapid schedules were actually 
profitable because so much extra traffic was induced to use the service 
that the additional costs were more than met. Some of the railroads 
in the now prosperous and thickly populated northeastern region, on 
the other hand — those that "have done well mider the old conditions" 
— are apparently unable to abandon the idea that lower rates neces- 
sarily means less net income. The experience of the roads which has 
proved otherwise remains unconvincing. Thus, a habit of thinking 
can be a formidable obstacle to progress. 

Whatever the nature and causes of the reluctance to move or to think or to 
work on the part of individuals, it is not only universally present, but manifests 
itself in a highly unbalanced way. * * * Inertia is a factor of very much 
greater importance as respects things not attained but possible of attainment 
than it is as to things already attained but possible of loss. For example, people 
wiU exercise themselves tremendously, sometimes tragically, to retain what they 
have, yet will make almost no effort to secure very much larger benefits entirely 
within reach.2' 

Thus, habits, essential as they are, nevertheless clearly contribute 
to bureaucratic unresponsiveness. 

Privitization oj junctions. — James O. McKinsey has aptly said: 

It is a natural tendency for the head of each administrative unit to think pri- 
marily of the welfare of his unit. It is the problem of the major executive to 
provide for coordination of all these units so that confliction and lack of balance 
may not result to such a degree as to prevent the attainment of the major objec- 
tives of the business.28 

Other executives agree that it is difficult to get men to lool-i at their 
work from the standpoint of the enterprise as a whole. Perhaps it is 
too much to ask that a person take a broader view when he sees so 
many of his fellows vegetating in minor positions because they were 
not sufficiently aggressive in advancing their own interests. Execu- 
tives complain that "A man's own record is all that counts," "A 
manager knows he will move on in 3 to 5 years. Therefore he wants 
to squeeze everything out in profits instead of planning a long-term 
program." Doubtless much of the reason for this view is the lack 
of proper incentives in the large corporations. As some point out, 
the balance sheet is often the onl}^ important criterion. This emphasis 
upon the financial record of particular subdivisions of an enterprise 
cannot help resulting in administrative sharecropping with its at- 
tendant wastes. 

Self-interest and jealousy are potent forces, and unless they can be 
directed into channels which further the purpose of the enterprise as 

"' Xiji.lo Machiavelli, The Prince, translated by W. K. Marriott (New York: Duttoni, p 45. 

''' Chester I. Barnard, Collectivism and Individualism, pp. 11-12. 

'''■ James O. McKinsey, Org? ''ization Problems Under Pre.sent Conditions, p. 11. 



g4 CONCENTEATION OF ECONOMIC POWER 

a whole they may be very disruptive to it. The proper harnessing 
of these forces constitutes one of the prime and as yet inadequately 
solved problems of industrial administration. The forces themselves 
cannot be eradicated, nor is it necessarily desirable that they should 
be. As Friedrich and Cole have pointed out in a related circum- 
stance — 

As long as a "privitization" of functions can be prevented, the fierce enthusiasm 
of the functionary for his function, of the official for the power of his office, is 
desirable for the accomplishment of the ultimate purpose for which they exist. 
In this sense it may be said that a bureaucracy lusty for power is greatly to be 
preferred to a bureaucracy satisfied to grow fat on the livings which it has secured 
for itself.29 

The desire for power. — Closely related to the jealousy and self- 
interest inherent in the privitization of functions is a desire for power. 
They' have in common a desire for distinction. Chester Barnard 
believes that "the most dynamic of all characteristics of human 
beings from the social standpoint is Ihe love of distinction." ^^ Another 
corporation official goes so far as to say that — 

Executives have large egos, and the success of a corporation depends upon giving 
them a chance to satisfy them. We must invent new incentives; the financial 
one shrinks, relatively, the higher up you go. Executives turn to new worlds 
to conquer. 

In this same vein, in relation to control at the top, Berle and Means 
have suggested — 

Just what motives are eflfective today * * * must be a matter of con- 
jecture. But it is probable that more could be learned regarding them by studying 
the motives of an Alexander the Great, seeking new worlds to conquer, than by 
considering the motives of a petty tradesman of the days of Adam Smith. ^i 

The desire for power and prestige is of such wide influence in the 
human breast that business leaders and their subordinates cannot be 
expected to be immune. The wish for more extended influence is 
particularly apparent in the "promoter" type of leader. He may 
win and lose several fortunes but he comes back, seeking to cross 
new horizons of influence. This urge is clearly present in the more 
common type of business leader who seeks steady if unspectacular 
expansion. 

The extension of economic power today is generally carried on in 
apparently more refined ways than were common in the last century. 
The obstacle to increased influence may be as surely removed but the 
device of buying out is now more popular than the former "forcing to 
the wall." Naked methods are frowned upon, and the leader, in 
expressing his desire for influence and prestige, must fit into the 
pattern. Even though the roadbed is being made into an excellent 
highway, the attempt of the New York Central in the eighties to 
"free Pittsburgh from the thralldom of the Pennsylvania" by building 
another road might be considered rather expensive if tried today. 
Rather, a mutually satisfactory agreement would be reached — as was 
eventually done in this-case. 

A man's desire to expand his influence is of course not confined to 
intercompany relations; it is also expressed in intracompany matters. 
This is particularly apparent when a new type of office is created. 
The process has been repeated over and over in corporate history. 

28 Friedrich and Cole, op. cit., p. 86. 

"> Chester I. Barnard, Collectivism and Individualism, pp. 8-9. 

" Berle and Means, op. cit., p. 350. 



CONCENTRATION OF ECONOMIC POWER 65 

Thus, the general manager or executive vice president has become 
more than an assistant to the president. Likewise, when the office 
of comptroller was invented the comptroller became more than an 
accountant. In many companies he expanded his functions until he 
was almost the chief executive officer. In the readjustment which 
has since taken place he is still an influential executive but pressure 
from his colleagues has forced him to acknowledge that others may also 
be of importance in an enterprise. Of course, today there is wide 
variation in his functions. Sometimes the word "comptroller" 
signifies a man of real influence; sometinjes it is little more than a title. 
At any rate, the history of this office" illustrates the growth of power 
and its eventual limitation by the assertion of a stronger power on 
the part of competing executives. It is entirely possible that the 
personnel and public-relations officers of today will go through a 
similar cycle even though they may never reach the heights of im- 
portance once attained by some comptrollers. 

Nor is the urge to increase one's importance limited to top execu- 
tives; it extends throughout the hierarchy. A most common observa- 
tion is the immediate attempt of a newly appointed foreman to seek 
unduly to assert his authority over his subordinates — to "show them 
who's boss." Related to such expression of command is the reluctance 
of some men, after they have been promoted, to relinquish activities 
with which they were formerly intimately concerned. Seemingly, 
increased authority does not detract from the appeal of the old realm 
of influence. 

This continual struggle for influence and power cannot help affecting 
the corporate bureaucracy. Such desire on the part of the chief 
executive, for example, may lead the enterprise into unprofitable 
channels. Expressed internally, it often prevents an adequate 
decentralization and delegation of authority. The resultant bottle- 
necks of decision make the bureaucracy slow and inflexible, aggravat- 
ing a tendency which inheres in all large enterprises. The struggle 
among executives creates friction and jealousy rather than coopera- 
tion,^^ and at the bottom the obnoxious expression of authority causes 
resentment and inefficiency in the ranks of the workers. 

The desire to grow in importance cannot be eradicated even if it 
were desirable. In fact, it may well be the most effective of incentives. 
Thus, it has been said — 

The maintenance of incentives, particularly those relating to prestige, pride of 
association, and community satisfaction, calls for growth, enlargement, extension. 
It is, I think, the basic and, in a sense, the legitimate reason for bureaucratic 
aggrandizement in corporate, governmental, labor, university, and church or- 
ganizations everywhere obaaTved. To grow seems to offer opportunity for the 
realization of all kinds of active incentives — as may be observed by the repeated 
emphasis in all organizations upon size as an index of the existence of desirable 
incentices, or the alternate rationalization of other incentives when size is small or 
growth is discouraged. The overreaching which arises from this cause is the source 
of destruction of organizations otherwise successful.'^ 

The problem — imperfectly solved as yet — is to keep the desire for 
increased scope of influence within its proper bounds. 

Decline of the prod of competition. — It may be true that much of our 
progress is due to man's laziness, which urges him continually to 
discover easier ways of doing things or of obtaining what he wants. 

3' Some executives, however, maintain that the best way to define a Job is to let the men work out the 
boundaries of their particular spheres for themselves. 
M Chester I. Barnard, The Functions of the Executive, p. 159. 



gg CONCENTRATION OF ECONOMIC POWER 

But the reverse is equally true: man's laziness creates a common 
tendency to let things slide when there is no effective prod or incentive 
to greater industry. Competition is one of the most important of 
these prods to activity, to progress through the threat to survival. 
Under the theory of atomistic competition it is an ever-present and 
ruthless force. Unless adjustment is made, a given business will 
speedily become extinct. 

But the economic environment of the large corporation is quite 
different from this. We have already noted that a large sector of 
our economy is characterized by the relative absence of competition — 
certainly competition of the atomistic type.'* As might be expected, 
of course, a relatively gentle or at least nonruthless type of rivalry 
affects the personnel of the corporate bureaucracy. But some execu- 
tives maintain that the large corporations are so free from- the acute 
stages of competition and have such immense reserves that their suc- 
cess is no real test of executive enterprise and capacity. 

The depression, however, at least intensified competition for the 
consumer's dollar among quite different types of business. The 
resultant prod upon the bureaucracy was much the same as though 
ordmary competition existed. Theoretically, management should 
seek constantly to maximize profits, and should never be satisfied 
merely because they appear to be adequate. But the urgency of the 
depression revealed how far from the truth that assumption is, because 
it reckoned without human laziness. The biggest companies felt 
the pinch and responded with increased attention to economies. For 
example, one large concern remained profitable throughout the de- 
pression simply by cutting expenditures to follow the reduction in 
revenue: "When revenues drop you figure out some way to make 
expenses drop correspondingly." Or again, practices arc reflected in 
such remarks of executives of large corporations as "[The company] 
has always been a profitable business and we haven't had to worry 
about management pruiciples very much — but it's clear we'll have to 
increasingly." . "As long as things are rosy they might as well be 
•left alone." "Executives are content to muddle along as long as 
profits are satisfactory. Attention to operating matters is the child 
of adversity." "Now that the depression is past all interest in manage- 
ment has- disappeared." "There is a point beyond which business 
organization becomes progressively inefficient and unresponsible. 
Probably it is because it becomes so powerful that it gets arrogant 
and careless. It knows it doesn't have to compete." "We wait 
until [our chief competitor] has tried out an idea and made it work. 
Then we do the same thmg. We can afford to wait." Thus, the 
absence of the continual prod of competition becomes apparent when 
companies are large and have a comfortable portion of the market to 
themselves. 

Decline in competition stems from yet another aspect of the large 
corporation. When business is small and competitive, the executive 
has a rough measure of his own efficiency in its financial success. 
When companies are combined into a large corporation, however, 
and their activities are consolidated into functional departments, the 
basis of comparison disappears. The efficiency of the production 
manager cannot be measured, for example, by the quantity of goods 
which the sales manager is able to dispose of. The result is that each 

•* Supra, ch. I. 



OONCETSTTRATION OF ECONOMIC POWER g7 

department and its functional subdivisions becomes a unit insulated 
from the general impact of competition. With this pressure removed, 
the natural tendency is to slacken the pace. 

It is easy to become oversentimental about competition but there 
is no doubt that its decline in respect to big business contributes to 
corporate bureaucracy. Of course, it is also true that the lack of 
competition in government or the church contributes to bureaucratic 
unresponsiveness in those realms as well. Human beings tend to act 
like human beings whatever the type of employment in which they 
may be engaged. 

Summary. — Large corporations do not escape from the personnel 
causes of bureaucracy in its rigidifying, unresponsive aspects, any 
more than they do from its structural causes. Leadership is some- 
times defective because of advanced age, lack of broad vision, or pro- 
motion on bases other than merit. Many companies fail to adopt 
policies designed to maintain a high level of morale on the part of 
their employees. Habit and inertia are potent bars to progress and 
change m the corporation as in other human relations. The tendency 
to privitize functions, to use office for personal rather than corporate 
advantage, is apparent here as elsewhere. The desire for increased 
influence is as plain at the lower levels of the corporate hierarchy as it 
is at the top. Finally, our limited examination has highlighted the 
effects of the decline of competition. With this prod removed, the 
pressure toward improvement is often relaxed. 

It is not accurate, therefore, to think of corporations as things 
apart, as far as the obtrusion of bureaucracy is concerned. They are 
just as subject to forces tending toward bureaucracy as are other 
combinations for himaan endeavor. 



PAKT III 

MANAGERIAL CORRECTIVES OF BUREAUCRACY 



69 



CHAPTER VII 
STRUCTURAL METHODS 

The administrative antidotes to the evils of bureaucracy are as 
numerous as the structural and personnel causes which we have dis- 
cussed. In fact, all administrative techniques may affect them. 
Thus, a complete survey of possible remedies would require a com- 
prehensive treatise on corporate management and is obviously be- 
yond the scope of this monograph. Nevertheless, we may briefly 
indicate some of the correctives which relate directly to the particular 
characteristics aiid causes which we have mentioned. 

This chapter is a condensed summary of some of the successful 
practices relating to administrative structure which we have found 
corporations to be using, or which we think they should use, in order 
to combat the ill effects of bureaucracy. It is intended simply to 
indicate avenues of approach ; it is not a manual of procedures which 
may be applied directly to given situations. Even if all corporations 
were alike, this would necessitate too long and detailed a discussion 
to be useful, while the actual heterogeneity of corporation problems 
makes such an attempt impracticable under any circimistances. The 
following discussion, therefore, relates to the general principles and 
methods which resourceful administrators may use in counteracting 
bureaucratic divisiveness, inflexibility <, miresponsiveness, and waste. 

The structural correctives to which this chapter is confined fall 
quite naturally into a number of groups. The first concerns the 
clear definition of objectives, responsibilities, and authority. 

Definition of objectives, responsibilities, and authority. — A prime req-. 
uisite of managerial unity is a clear understanding of objectives. 
"We don't know where we're going but we're on our way" is an 
attitude which should have no place in business enterprise. Of 
course, the future cannot be accurately foretold, but a working goal 
can and should be determined. It is perhaps true that "the greatest 
need of the average business is a more perfect recognition of its 
larger purpose." ^ 

A QarefuUy expressed, impersonal purpose for the enterprise as a 
whole may not be vital to the small concern, where loyalty to the 
wishes of the dominant executive may be adequate if they are suffi- 
ciently clear. In the large business, however, personal relationships 
are not so prevalent, and a substitute in the form of a corporate ob- 
jective must be found in order, to maintain morale and to direct the 
efforts of both executives and employees toward a conmion end. 
Only through such unity can the potentialities of the large corpora- 
ti(m be even approximated. But a common objective contributes 
something more than this; it strikes some of the shackles of bureau- 

> Webster Robinson, Fundamentals of Business Organization (New York: McGraw-Hill, 1925), p. 17. 

71 



25832.5 — 40— No. 11- 



72 CONCENTRATION OF ECONOMIC POWER 

cratic inertia and releases human enthusiasm; it is a powerful spur 
to initiative and to sincere, loyal effort "^ 

A symbol or objective like "the best service at the least cost, con- 
sistent with financial safety'" is broad and lacks something in definite- 
ness. It is, however, more specific; and may contribute more 'to 
morale and effort than. the slogan "Maximize profits." As one exec- 
utive pointed out, profits are only a byproduct of the realization of 
other objectives. Attractive service, minimum waste, efficient 
workers, and ample capital, as well as the ever important element of 
luck, all contribute to profits. The head of one large corporation 
has suggested, for example, that there are three main objectives of 
managemerit: A return on investment sufficiently high to insure the 
offering of ample capital; wages and other attributes of advanced 
labor policies adequate to attract a sufficient supply of qualified 
workers; and quality of product,. at a price reasonable enough to 
attract and satisfy customers. He maintains that — 

The first responsibility of management is to think through the objectives and 
make them known to all parties. A concern should figure that it is in business 
for a long time and hence be temperate and consistent. These three objectives, 
plus inspiring leaders, are all a corporation needs for good morale and institu- 
tional vitality. 

The more definite the objective the easier it is for all administra- 
tive personnel to appraise their activities in terms of what they wish 
to achieve. It is difficult, of course, to give specific expression to a 
long-range objective, though most corporations could do better if 
they tried. Short-term goals, on the other hand, can be made satis- 
factorily precise if the proper machinery is established. 

An essential part of good budgetary procedure is the selection of 
objectives for the period to be covered, their expression in measurable 
terms, and the allocation of resources to those ends. Though usually 
described in monetary units, budgetary objectives are often improve- 
ments in service, expansion of facilities or markets, and the like. 
Measurement may also be in nonmonetary units, however, such as a 
riecrease in the average number of seconds in which a telephone opera- 
tor answers a signal on the switchboard, or fewer customer complaints. 
When such subobjectives are clearly determined and communicated 
to all concerned, it is easier to combat bureaucratic tendencies toward 
diffusion of effort. 

Unity of effort likewise demands that the policies of an enterprise, 
whereby objectives are reached, shall be definite. This is particularly 
the province of the top executives and of the board, if it is active. 
Clear definition in method and policy as well as in objective may 
reveal elements that are unclear or inconsistent. Improvement is 
thereby the easier because they can be corrected or eliminated. 

Definition of responsiblities and authority also helps to overcome 
bureaucratic confusion and divisiveness. The determination of re- 
sponsibilities is, indeed, a pp-t of the process of clarifying objectives 
and policies. Essen tiallly it is the assignment o"f portions of the 
objectives to specific executives and their subordinates. It defines a 
particular job and thereby facilitates its execution. The delimita- 
tion of spheres of authority also determines who shall give orders to 
whom, helps to eliminate the confusion caused by conflicting orders 
from several persons, and shows up instances of inadequate supervision. 

2 Cf. Ordway Tead, "Purpose as a Psychological Factor in Management," Bulletin of the Taylor Society, 
X (Deci^mber 1925), p. 254. 



OONOENTRATION OF ECONOMIC POWER 73 

It is possible, of course, that if the definition of responsibilities and 
authority fails to allow for changes in these spheres, a rigidification 
may set in; this corrective of the evils of bureaucracy might then be 
more than counterbalanced by resulting inflexibility. There is, 
therefore, something to be said for the contention of some executives 
that it is best for the top men to work out their own sp'heres of in- 
fluence. At least this method allows for change, even though con- 
fusion and bickering may also follow. We are of the opinion, how- 
ever, that clear definition by one means or another is predominately 
advantageous and that mflexibility may to a considerable extent be 
offset by other means of adjustment. -In the modern large corpora- 
tion we do not feel that such definition has gone far enough. 

Preventive maintenance applied to administration. — One promising 
method of supplying flexibility to an enterprise is what may be called 
preventive mamtenance; that is, the periodic reexamination of exist- 
ing policies, responsibilities, and even objectives, as well as of the more 
detailed practices which are accessory to them. Such a reexamina- 
tion is particularly rewarding where important elements of administra- 
tion have been clearly defined. Paradoxically, it is in this way that 
the possible inflexibilities resulting from clear definition may be dis- 
covered and eliminated. 

We in America have paid much attention to economy and efficiency 
in the use of materials, but have often neglected improvements in the 
use of human resources. The idea of preventive maintenance is a 
good illustration of "this. A number of companies, for example, have 
adopted the practice of periodically examining their equipment in 
order to repair or replace defective parts before they actually break 
down. To wait for a wrecked train to reveal a cracked raU, a series 
of rotten ties, or a weakened culvert is clearly poor. economy. To 
wait for a boiler explosion to indicate that tubes have been burned 
out falls into the same category. On a lesser scale, the total cost of 
periodically examining telephone equipment ma}'^ be less than that of 
making special trouble trips and of losing business and goodwill- 
through defective service. At least the American Telephone & Tele- 
graph Co. feels that preventive maintenance is a good investment. 

As was pointed out in the preceding chapter, however, so continu- 
ing an interest in. administration is not typical of the large corporation. 
Time studies of he activities of workers may be common enough, but 
a similar attention to administration is too often neglected except in 
periods of stross. So long as profits are adequate the executive finds 
it easier to check on, his subordinates than on himself. When reve- 
nues drop or an aggressive competitor enters the field, on the other 
hand, he is apt to reexamine methods and objectives. This incon- 
sistency is human but it has results which are bureaucratic. The 
stimulation of searching and continuing self-criticism is one of the 
greatest needs of corporate management. All too rare is the execu- 
tive who maintains that because something has been done a certain 
way for 25 years it must therefore be the wrong way now. Even 
though his idea of the right method may leave something to be de- 
sired, he wUl prevent stagnation and retrogression. 

We submit, therefore, that as an antidote to bureaucratic inflexi- 
bility and maladjustment to changing conditions, a procedure of 
periodic reexamination of corporation policies, objectives, and prac- 
tices be adopted. These, of course, must be clearly determined. Such 



74 CONCENTRATION OF ECONOMIC POWER 

a reexamination will probably require the full-time effort of a number 
of staff men, as Well as much of the attention of the executives, who in 
addition must have the will to adopt changes when they appear 
advisable. 

The duties of the staff men should include the constant checking 
of the results of policies, the examination and development of new 
practices, keeping abreast of changing social and technological con- 
ditions, and periodic recommendations to their superiors regarding 
the retention, abandonment, or revision of objectives and procedures. 
The executives, who are policy determiners, must so arrange their 
work as to have time for'the continuing critical examination of these 
matters. Too often the modern corporation ofRcial is so immersed 
in day-to-day operations that he has no opportunity to consider the 
less pressing, though more important, questions of policy. 

Placing this reexamination of objectives, policies, and practices 
upon a regularly recurring instead of a crisis basis would aid materially 
in meeting difficulties before they arise and in many .cases would 
prevent their arising at all. As an antidote to bureaucracy it would 
keep administrative organizations from becoming over rigid, 
unresponsive, and maladjusted to a changing environment. More- 
over, corporative self-criticism and the resuUijig corrective action is 
more effective and less disruptive than the same treatment adminisr 
tered by outside forces or agencies. 

Standard pracfiees and their proper place. — A third administrative 
antidote for tt^e undesirable aspects of bureaucracy is the judicious 
use of standard practices. Rules of action are, of course, indispen- 
sable in the operation of any large enterprise. In no other way can 
the ideas of the best brains at the top be transferred into appropriate 
and unified action throughout the enterprise. Size makes personal 
direction impracticable in the modern corporate 'giant. The only 
workable substitute is the utilization of standard rules and procedures. 

There is much that could be done to improve and enlarge the use of 
standard practices. In only a few of the large corporations are these 
clearly determined and handily published for the use of all affected 

{)0rtions of the hierarchy. Companies which are deficient along this 
ine should remedy the fault. This means that certain staff employees 
devote themselves to the study of job requirements and the develop- 
ment of practices to meet them. Such work requires the time and 
expense that goes with continuous planning, research, and testing; 
but the companies that have given the process a thorough trial are 
usually convinced that it is money and effort well spent. Proper 
planning is a major deficiency of large corporations, though it must be 
said that as a rule they give it more attention than do the smaller 
concerns. 

' Even the "best rules have a disconcerting way of becoming obsolete 
or inappropriate in exceptional, concrete situations. Only by con- 
stant readjustment to changing conditions can this be prevented. 
Periodic reexamination and revision of rules is one means to this end. 
In addition, a flexible attitude toward rules is required when the 
bureaucratic snare of legalism fastens itself upon the company. Few, 
if any, of the large corporations have entirely escaped from this species 
of red tape. Thus, it is risky for an employee to violate a regulation, 
So long as he obeys he has a covering excuse if his action is inappro- 
priate. If, however, he exercises his own" judgment contrary to a rule 



OONCENTRATION OF ECONOMIC POWER 75 

he runs the risk of reprimand or discharge, even though the results of 
his action may not be particularly calamitous. Speaking of his com- 
pany, an executive has remarked, "A man may be fired for one not 
very serious mistake." 

The emphasis upon legality, which we noted in the preceding chap- 
ter as a prominent cause of the evils of bure acracy, must be balanced 
against an emphasis on results. In order to reduce confusion to a 
minimum, weight must be given to obeying rules as such, but it is all 
too easy to overdo it. The only reason for rules in the first place is 
to obtain results. The end product is what really counts. 

An interesting illustration of encouraging disobedience jn order to 
obtain a desired end is found in political history. Empress Maria 
Theresa, of Austria, had a healthy skepticism regarding the acumen 
of her military commanders. Because of this she estahlished the 
highest military decoration of the Empire to be bestowed upon officers 
who acted successfully in disobedience to their commanders. The 
penalty for failure, of course, was death. Perhaps miKtary men become 
accustomed to such risks, for the decoration has been bestowed upon 
some intrepid ofiicers. The late Emil Fey, for example, was honored 
with the Order of Maria Theresa for a maneuver which he carried 
out during the first World War. Although his superiors ordered him 
to retreat, he saw an opportunity for a successful advance and 
carried it out. 

It would be a healthy thing if something of tliis attitude were 
encouraged in business administration. It might well assist in 
counteracting the tendencies to follow rules blindly and "to pass the 
buck" when there has been mistaken action. Initiative all along the 
line should be encouraged. Otherwise interest is lost, good rules turn 
into bad ones, and bureaucratic legalism with its attendant ossification 
settles upon the enterprise. 

It is interesting that some corporations allow for disobedience to 
rules. In these concerns, when an executive adopts a different 
practice than that determined by the central office he is often allowed, 
to use his own discretion. He is expected, however, to support his 
noncompliance with adequate reasons and to demonstrate the validity 
of his convictions with results. His reward is turning in a better 
operating record than his past one or those of corresponding officers in 
other parts of the company. We know of no case where honorary 
citation or other special recognition is given for intelligent disobedience. 

In summary, it may be said that in order to check the tendency 
toward bureaucratic legalism, several related policies should be 
adopted by corporate management. Thus (1) standard practices 
and rules should be developed carefully, based on substantial factual 
material and continually reexamined for r .,:;sible change, (2) care 
should be taken that too many rules are not promulgjated "ii is better 
to err on the side of too little standardizatij i than to discourage initia- 
tive"; (3) except where uniformity is pa ticularly important, discre- 
tion should be allowed to executives ir .'.pijlying rules, although it 
should diminish, of course, with the d 'crease in hierarchical rank; 
(4) emphasis should be on results rathei t lan legality, and intelligent 
disobedience might even be rewarded. Moreover, the results to be 
emphasized should be more than a f ir mcial profit. Performance 
must be measured in other terms as wsll. An indication of some 
of those is Hiscussed in the next section 



76 CONCENTRATION OF ECONOMIC POWER 

Improvement of devices of internal coordination and control. — The 
evils of bureaucracy may be attacked through still a fourth group of 
practices, centering around the procedural attainment of unity and 
effectiveness. Broadly conceived, coordination and control may be 
considered as including practically all of management. Our discussion 
of them, therefore, will be limited to some of the highest of the high 
spots. Essentially, they are the processes of inducing persons to 
direct their efforts efficiently toward a common goal and of checking 
to see that these efforts are in fact efficient. They involve communi- 
cation, inspiration, and some element of coercion, with communica- 
tion probably the most Imj '^rtant as v/pU as one of the most difficult 
to attain in a large enten ri. 3. 

Our brief discussion will center around three main questions: 
What shall be communicated? What channels shall be employed? 
What use shall be made of the information? In terms of the causes 
of bureaucracy which we have discussed, coordination and control 
may be utilized as an antidote for divisiveness and separatism in the 
organization, for'preventing the privitization of functions, for directing 
the desire for power into channels beneficial to the enterprise, and for 
compensating for the absence of competition. 

Communication is of course a two-way process whereby the various 
parts of the enterprise learn what others are doing and thinking. 
The subject' matter is as wide as the interests of the corporation 
itself. Policies and decisions must be commimicated to all who are 
to carry them out. Executive action must be communicated to all 
affected parts of the enterprise, and especially to the top if operations 
are to mesh properly in a common endeavor,. And when results come 
in, they too must be communicated to all sections of the company: 
the top executives must know them in order to determine whether 
or not to change particular policies, or to move, remove, or promote 
particular executives; the directors and the stockholders wish to 
judge the stewardship of the executives ; and the rank and file employees 
need to appraise their own effectiveness. 

To a considerable extent the usefulness of communicated results 
depends upon the units of measurement which are used. Profits and 
unit costs expressed in monetary terms are the most common. Al- 
though the cost-accounting systems of the large corporations could 
doubtless be materially improved, they are generally of a more 
advanced type than those, if any, used by the smaller companies. 
Despite their scientific, objective appearance, financial criteria 
inevitably have an element of arbitrariness. For example, any alloca- 
tion of joint costs between several products or departments of an 
enterprise is arbitrary and at best an intelligent guess. However, our 
chief criticism of the measurement of results in the large corporation 
is the exaggerated reliance placed on the monetary aspects of profits 
and costs. 

The monetary measurement of results is subject to severe limita- 
tions. For one thing, profits are often due to fortuitous circumstances 
quite beyond the control of management. A change in the price level, 
for example, may cause large losses or gains on inventory which will be 
reflected in apparent profits or losses. Overemphasis of profits and 
low costs may also lead executives to attempt to squeeze out every- 
thing possible in earnings and to ignore the resultant long-range 
effects on the enterprise. Administrative sharecropping can be as 



CONCENTKATION OF ECONOMIC POWER 77 

destructive of the resources of a company as its agricultural counter- 
part often is of land. In the third place, financial standards are 
inappropriate, or inadequate, to measure most administrative activity. 
A reduction in the costs of running the personnel department, for 
example, may merely mean that a poor job, is being done. A high 
record of collections may be obtained at the expense of losing many 
customers through harsh treatment. Low costs may be gained 
temporarily at the expense of driving employees unduly or by failing 
to promote men whose capabilities indicate that they should be ad- 
vanced. A good financial record for part of an enterprise may mean 
a poor record for the company as a whole. 

Some companies have made commendable progress in developing 
nonfinancial units by which to measure operating results. They 
start with some objective such as a yearly decrease in errors in han- 
dling customers' orders or even the development of new executive 
talent. The unit of measurement then is related to the particular 
objective. Errors per thousand orders are recorded as well as the 
subordinates of particular executives who are developed into executives 
themselves. In both instances the unit of measurement is related to 
major objectives of the corporation, objectives of a nonfinancial 
character which, however, influence the financial record. 

Of course, financial measurements camiot be neglected. An enter- 
prise must make expenses or be forced into bankruptcy. What is 
needed, therefore, is a system of appraising results in nonfinancial 
terms that will supplement an appraisal in financial terms. Thus it 
may be possible to overcome the shortcomings and distortions of the 
latter type used alone. 

The how of communication is as important as the what. Superb 
information is of no value unless it is effectively made known to those 
who can use it. The simplest type of transmittal, of course, is face- 
to-face conversation. In many respects it is the best. The large 
concern, however, is constitutionally unable to make widespread use 
of this method. There" are simply too many people involved for 
face-to-face contact throughout the enterprise. Nevertheless, it can 
be used within certain Ifmits even in the giant corporation. Informal 
contact between executives is essential to a common viewpoint. As 
one executive pointed out, "When top executives begin to write letters, 
you know relations are strained." 

Coordination through face-to-face contacts can be promoted in 
several ways. One of the simplest and most effective is to locate the 
various executives whose work is to be coordinated in the same 
building, preferably on the same floor. Under that arrangement, 
officials may and usually do quite easily compose their differences and 
mutually readjust their programs among themselves. It is surprising 
how physical distance augments mental distance, and correspond- 
ingly, how helpful to coordination a decrease in physical distance may 
be. The successful experiences of some corporations along this line 
should be copied whenever possible in others. 

Interdepartmental committees also assist in meshing the various 
activities of an enterprise. The coming together of executives in such 
groups facilitates mutual adjustment. A formal committee with 
regular meetings is particularly useful in inculcating the habit of 
working together. Once this is established, the periodic meetings 
may be changed to occasional gatherings to deal with particular 



78 CONCENTRATION OF ECONOMIC POWER 

problems as thej'' arise, or the formal group may even be disbanded 
without weakening the habit of face-to-face contact when necessary. 

As a safeguard, however, the various interested executives may be 
expected, or informally required, to get together themselves when the 
appropriate occasions arise. Some of the subsidiary companies of the 
American Telephone & Telegraph Co., for example, ,rely upon such 
informal methods for much of their coordination. If the traffic man- 
ager feels that his service record is not so good as it should be, due 
perhaps to imperfections in some phase of plant maintenance, he will 
consult with the plant manager and the two will generally reach an 
agreement. If another functional officer is also involved, the traffic 
manager will consult with him as well. Similarly an executive may 
call in particular subordinates as the need arises instead of holding 
regularly scheduled staff meetings when there is not enough inter- 
departmental business of interest to all. Informal, spontaneous 
coordination of this type, however, is dependent upon a well-ingrained 
habit of cooperation. In the absence of this habit it must be developed 
even if more formal means are necessary to accomplish it. 

Much .of. the informal meeting of minds which we have been dis- 
cussing takes place across, rather than along, hierarchical lines. The 
pattern of authority set by a particular hierarchy is commonly unable 
of itself to achieve the necessary degree of coordination. If juris- 
dictions are Sillocated on the basis of fimctioh, for example, a supple- 
mentary system of coordination covering particular territories or 
commodities should be established. It has usually been found, where 
tried, that this should be relatively informal in order to avoid con- 
fusion. "No man can serve two masters" has commercial as well as 
religious meaning. Short paths of communication are essential in 
overcoming the lethargy inherent in large size. Hierarchical channels 
are too long for emergency action and become congested if all matters 
for decision must follow them to the end. Informal horizontal com- 
munication, therefore, is of real assistance in overcoming the inflexi- 
bilities of corporate bureaucracies. There is much room for this type 
of improvement in the large corporations, and the resulting benefits 
of increased coordination and vital humanncss are too great to be 
neglected. 

To a certain extent, of course, formal methods are essential to the 
eflPcctive operation of the large enterprise. Policies and decisions 
which have widespread or long-term application must be carefully 
committed to paper. Enough distortion of meaning takes place 
under any circumstances, and if word of mouth is relied upon to carry 
the message through a number of steps it may be quite wide at the 
end of the process. Likewise human fallibility of memory changes 
the meaning of any decision over a period of time. Reducing policies 
to writing, therefore, not only clarifies them but also gives them a 
form which is capable of fairly accurate transmission and extended life. 
Nevertheless, it is a tool to be cautiously applied lest it degenerate into 
a mass of paper which will stall or at least hinder the administrative 
process. 

Written reports of various kinds are universally employed both in 
business and hi government to discover what is happening in the 
different sections of the enterprise and to provide bases for modifying 
undesirable action or results. Thus, most of the large corporations 
make extensive use of reports relating to items on the balance sheet 



CONGENTRATION OF ECONOMIC POWER 79 

and profit-and-loss statement. It is probably true that financial 
statements are the most useful means of controlling business activity. 
A corporation must make ends meet or suffer extinction, and the 
effects of poor administrative methods are often revealed in high costs 
or low revenues. It is natural, therefore, to find the typical attitude 
among executives expressed thus: "The balance sheet is the best way 
we have of checking our men." 

Some executives, however, recognize the inadequacies of balance- 
sheet reports as all-sufficient managerial control devices and have 
supplemented them with other means. Thus, the record of actual 
results compared with budget estimates or assigned quotas is widely 
used. The items may be much the same as those on the balance sheet, 
but the bases of comparison constitute a refinement beyond simple 
profit, loss, or expense. Some companies, noticeably the American 
Telephone & Telegraph Co., issue reports on matters not included in the 
balance sheet and the budget, such as, for example, the percentage 
of telephone-installation appointments which were kept and the reasons 
for missing those which were not. The graphic method of presenta- 
tion is commonly used in order to show more clearly the broad outline 
of results. These performance items cover a wide range of subjects 
and constitute a significant group of data supplementary to the finan- 
cial results. Much coidd be done to their advantage along this line 
by other large corporations. 

Some corporations have established a sort of departmental channel 
of communication and control relatively separate from the rest of the 
hierarchy. The controller, or one who exercises similar functions in 
the keeping and examining of accounts and passing on expenditures, 
is sometimes so placed that he reports directly to the board or the 
finance committee. His men may provide budgetary estimates as 
well as audit accoimts. The relationship, of course, has drawbacks 
as well as advantages, for the independent check which it provides 
may well be counterbalanced by the confusion which sometimes 
results. Thus, the head of one company with this system is supposed 
to have said, "It took me 6 years as president to discover that I 
wasn't supposed to control the controllers." The dual control is a 
source of friction. A thoroughgoing audit conducted by agents of the 
top men of the corporation would probably accomplish most of the 
benefits of this independent relationship without as much trouble. 
Nevertheless, the practice docs emphasize the desirability of separate 
channels of information. Thus, for example, when these are the same 
as the channels of control, data may be slightly distorted lest it be 
used to the disadvantage of the members of the hierarchy through 
whom it passes. Separate lines obviate this difficulty. 

The channels of communication for purposes of coordination and 
control are thus numerous and varied in large enterprises. Personal 
contacts, although usefid, are necessarily limited by the size of the 
corporate giants Written reports are the mainstay of control, but 
relatively too much emphasis is placed upon balance-sliect items and 
too little upon othef measurements of managerial efficiency. The 
independent controller has the advantage oi freedom and the dis- 
advantage of injecting administrative confusion into the bureaucracy; 
the chief benefits of the system could be gained in another way with 
less confusion. But just as results rather than legality are more, 
important in relation to standard practices, so the use of the types oi 



80 CONCENTRATION OF ECONOMIC POWER 

information and of the channels of communication which we have 
been discussing is more important than the structure itself. Good 
information and transmission channels are of no value unless properly 
utihzed. 

Information has four principal uses in corporate management. 
First, it serves as the basis for policies and decisions. In these respects 
it is closely identified with objectives, or the direction toward which 
corporate activities are pointed. 

Second, in relation to coordination and "control, information is 
essential in harmonizing the activities of the enterprise, in correcting 
discrepancies and in providing incentives for greater productivity. 
To a considerable extent, harmonization of activities follows directly 
from the dissemination of accurate and sufficiently comprehensive 
information, for executives are then better able to see their roles in 
the corporate whole and to readjust their actions accordingly. In 
many ways this is a superior type of coordination because it depends 
on good will and a natural readiness to work together without the 
immediate threat of coercion. Of itself, "however, the mere dissemina- 
tion of information is usually not enough. Other uses of it must be 
made in order to limit the temptations of noncooperation or worse. 

The third use of information is to check the legality or wisdom of 
executive action. In financial matters this is ordinarily done by 
means of the audit, which in the large corporation is typically a mix- 
ture of preaudit and postaudit or a check on legality and accuracy, 
and to some extent on wisdom, both before and after expenditures are 
made. The postaudit is usually more detailed and painstaking than 
the preaudit, which is brief, go as not to delay unduly administrative 
action. Executives may be given authority, for example, to make 
expenditures within certain specified limits on their own iriitiative and 
discretion. Expenditures in excess of these amounts may then be 
subjected to a type of preaudit, or specific authorization. Within the 
limits, however, funds are dispensed at the work of the particular 
executive, and much time and red tape are thereby saved. Ordinarily, 
the privilege is not abused because executives are reluctant to make 
illegal or careless expenditures which may later be embarrassing to 
them. Thus, since administration is a continuing process, the post- 
audit is effective without being obstructive. 

The fourth use of information is to appraise the efl^ectiveness of the 
various parts of the enterprise. This may be done by comparing the 
performance of a particular section with past performance, with 
budget estimates and with the records of corresponding parts of the 
organization. The basis of comparison provided by competition 
among large corporations through their relative profitability is 
markedly limited. Internal comparisons such as we have mentioned, 
therefore, substitute to some extent for the spur of conipetition and its 
ruthless weeding out of inefficieflfit concerns. 

Thus, comparison with past performance is one method of stimulat- 
ing efficiency. "Each year yoii have to be a little better than the 
year before or there will be someone else in your job,'' expresses what 
appears to be the policy in some of the large corporations. The 
validity of such comparisons is obviously subject to the limitations 
imposed by changes in the conditions under which business is con- 
ducted. For example, earnings in a period of general depression can 
scarcely be expected to equal those of a prosperous year. Such com- 



OONCEISTRATION OF ECONOMIC POWER gl 

parisons do have the advantage, however, of dealing with the same 
unit of administration. Hence, differences which may invalidate a 
comparison between areas may not affect one of different time periods 
for a particular enterprise or part of -an enterprise. 

A comparison of results with budget estimates shows to what extent 
particular executives know and control their departments. It indi- 
cates where they have exceeded expenditures or otherwise disrupted 
^the over-all plan of the company, and how far they have indulged in 
wishful thinking in making their plans. Only if results can be made 
to approximate estimates can the tool of the budget be useful as a 
planning and control device. 

A comparison of the results of corresponding subdivisions of a com- 
pany offers a parallel to and a substitute for competition among 
enterprises. Indeed, in some respects it is superior as an indicator of 
the relative effectiveness of particular executives. The organizational 
pattern of the enterprise, of course, must be suited to this type of 
control. The volume of sales, for example, cannot be compared with 
some aspect of the accounting department and thus provide a basis for 
judging whether the sales manager is a more effective executive than 
the chief accountant. The technique can only be applied to corre- 
sponding departments and subdivisions. Ordinarily this means terri- 
torial as well as functional divisions in the organizational scheme. 
Since the large corporation with its widespread activities usually has 
such a territorial pattern, it is especially adapted to control by com- 
parison. Financial criteria are usually applied, though these are 
supplemented in some concerns by financial measurements of profi- 
ciency. The process could probably be usefully extended as an aid 
in combating the lethargy which often exists where competition among 
companies is absent.' 

Some reward should be provided for those men who, due entirely to 
their own efforts, compare favorably with others in the enterprise. 
Incentives should be closely allied with results. But it is equally 
important that results emphasize company welfare as well as personal 
advancement. Thus, an executive should not be given credit for an 
individual record gained at the expense of the company as a whole. 
Rather, he should be commended, for example, for developing sub- 
ordinates into executive material even though through their promo- 
tion he loses that part of his staff which enables him to make a good 
showing. The delicate balance between individual and company 
welfare can be approximated only by introducing elements of both 
into the coordination and control system. 

Thus, a thoughtfully conceived system of coordination and control 
will help to overcome several of the bureaucratic handicaps of big 
business. It minimi'zes the diffusion of authority and separatism; 
retards the use of executive office for private ends at the expense of 
the corporation; directs the desire for increased personal influence 
toward the common good; and compensates for the loss in drive 
resulting from a drop in competition. By emphasizing nonfinancial 
as well as financial units of measurement, furthermore, a proper 
control system within a large corporation may be even more effective 
than control through the imperfect pressures of the market under 
competitive conditions. 

The coordination and control systems of some of the large cor- 
porations are generally poorly developed. Some of them may even 



g2 CONCENTRATION OF ECONOMIC POWER 

be called primitive in many respects. Very few companies have 
evolved as effective a system as they might. Many of the undeskable 
aspects of bureaucracy, therefore, which we find in the large corpora- 
tions could be removed by simple improvements in coordination and 
control. 

Decentralization . — Bureaucratic inflexibility may also be neutralized 
by intelligent administrative decentralization. This may be achieved 
in two important ways: first, by the scattered physical location of 
units of the enterprise, and second, by the delegation of discretionary 
power to subordinates. So far as physical decentralization is con- 
cerned, the large corporation is usually forced by its very size to 
adopt it. Its merchandishig units, for example, must be accessible to 
its customers, and transportation and communication costs require 
that plants be located near the necessary materials and services. 

As regards decentralization of authority, on the other hand, four 
basic factors are listed by L. Urwick. These are space, time, span 
of control, and morale.^ When plants and staffs are scattered, for 
example, it is difficult for one person to supervise them. Delegation 
of authority, therefore, to those on the scene who need to deal with 
problems as they arise, helps to solve the difficulty. The influence of 
the time factor is somewhat similar. In general — 

Whenever a unit in an organization is situated where almost immediate refer- 
ence to a superior authority is impossible some individual in that unit must be 
assigned responsibility for its general conduct and the corresponding formal 
authority. For this there are two main reasons: (o) In the event of emergency 
someone must take charge, and at once. If no single individual is responsible 
there is a risk of uncertainty and delay when they prove most disastrous. * * * 
(6) If the unit includes individuals whose work is interdependent, there should be 
someone on the spot whose duty is to forestall and to alleviate any differences 
which may occur between them. Coordination is a continuous task; it cannot be 
performed satisfactorily if the presence of the coordinator is intermittent.* 

Important as are the impersonal factors of space and time, however, 
the psychological aspects are equally significant. Although it is not 
possible to indicate with mathematical precision the number of imme- 
diate subordinates that one man can profitably supervise, it is never- 
theless clear that there are limits to an executive's effective span of 
control.* When an enterprise or a branch of it becomes so large that 
one person can no longer directly oversee its staff, it is essential that 
he either delegate authority or sacrifice efficiency and unity of action. 
The so-called exception principle of management stems largely from 
the necessity of reducing the scope of an executive's attention. 
Following this principle, subordinates attend to ordinary and recurring 
matters while their superior deals only with exceptional situations. 
That this procedure has thousands of years of tradition ^^ehind it is 
well illustrated by the favorite quotation of Mooney and Reiley: 

And Moses chose able men out of all Israel, and made them heads uver the 
people, rulers of thousands, rulers of hundreds, rulers of fifties, and rulers of tens. 
And they judged the people at all seasons: the hard causes they brought unto 
Moses, but every small matter they judged themselves." 

Proper delegation of authority is also essential to morale. Execu- 
tives sometimes emphasize that it is better for a man to make a few 
mistakes while exercising his own initiative than to allow no such 

3 See his "ExRcutive Decentralization With Functional Coordination," TuWic Administration, Xni 
(1935), pp. 344-358. 
* Ibid. 

» See Marshall E. Dimock, "The Span of Control in the Federal Government." 
« Exodus XVIII: 25, 26. 



CONCENTRATION OF ECONOMIC POWER gg 

latitude. Initiative is one of the most important qualities of leader- 
ship, and "nothing is more destructive of initiative than interference 
from above which appears unreasonable, or authority inadequate to 
the task assigned.'' 

The ej^ecutives of some corporations recognize the value of decen- 
tralization. The head of one large company, for example, insisted 
that local managers should be given fair measure of independence: 
^'I have fought with my board and with my vice presidents," was his 
comment; "I contend that the local managers should be permitted to 
make mistakes. They're bound to make mistakes sometimes. Let 
them do it. What we're interested in are results.''' Another main- 
tained that his company ''would fail if it didn't decentralize. It 
couldn't be run from headquarters even if all its executives were super- 
men — as they are not." Nevertheless, the large corporations are faced 
with a difficult dilemma. They must allow decentralization for the 
reasons we have mentioned; but they must also insure over-all coordina- 
tion, especially of policy, and clear emphasis upon iho. welfare of the 
company as a whole. 

> Striking the proper balance between centralization and decentraliza- 
tion is one of the most important problems with which management 
has to deal. Wherever it is successfully solved there would seem to be 
few other serious obstacles to the administration of any large enter- 
prise. It must be admitted, however, that a complete solution is 
rarely attained. On the one hand, the executives at each level must 
have sufficient authority to handle situations as they arise. But on 
the other, broad policies, a system of control (particularly of the post- 
audit variety), the provision of advice, and programs for maintaining 
unity must be centralized. Just what degree of decentralization 
should be allowed in particular cases must depend upon the judgmetit 
of the officials involved and, all things considered, it is a remarkably 
difficult decision to make.- • 

The necessity for a balance between tl^e two extremes has been well 
■expressed by James .0. McKinsey: 

Most men pride themselves on being individualists, but no man can be in any 
true sense an individualist in our modern forna of organization. He is only a 
specialized unit in a large cooperative enterprise. Most men work best, however, 
when they feel thej' are working as individuals, so the successful executive must 
strive to give the specialists he supervise^ such freedom that their initiative will 
not be restricted unduly, but at the same time, the executive must exercise such 
•control as to provide sufficient coordination to prevent wasted effort and ill effects 
from the conflicting activities of these specialists.^ 

Perhaps a good executive viewpoint is that " centralizatidh of author 
ity should always be regarded as a necessary eviK^ be kept to th 
minimum. It's a passport to bureaucracy in the present and, lik 
bureaucracy, it sterilizes the hopes of the future." ^ 

An emphasis upon public relations. — A few companies find that 
administrative flexibility is aided by an emphasis on public relations^ 
that is, giving primary consideration to the .effect upon customer 
satisfaction of every act, even if it requires exceptions to general 
rules. Thije emphasis has three principal effects. First, public rela- 
tions of the inward searching type requires a sufficient delegation of 
discretion to allow employees to handle specific cases according to the 

* L. Urwick, op. cli. 

• James O. McKinsey, Organization Problems Under Present Conditions, p. 10. 
« li. Urwick, op. cit., p. 349. 



§4 CONCENTRATION OF ECONOMIC POWER 

circumstances involved. Serious illness, for example, may extend an 
otherwise shorter credit period; collection routine must be adapted 
to the necessities of the situation. 

In the second place, emphasis upon public relations may change 
the standard practice used or even the organizational structure itself. 
In the Bell System, for instance, a customer with a complaint used to 
be shunted from section to section until he found the person who dealt 
with his particular trouble. The process was often long and discon- 
certing, and was finally changed as an aid to better public relations. 
Clerks were trained to handle a number of kinds of complaints or to 
know clearly to whom such matters should be referred. Now the 
customer sees only one person who handles the matter almost regard- 
, less of its nature. The customer is better satisfied and the employees 
have received a lesson in the importance of a pleased public. The same 
general idea carried further up the hierarchy may make it advisable 
to place general managers or even separate subsidiary corporations in 
charge of the activities of a particular area of a widespread company. 

Finally, emphasis upon public relations, is a touchstone to apply to 
alternative decisions in order to pick the best. Thus, the head of 
one large corporation has told a number of his executives: "I find it 
a useful device to ask myself the question, 'What would we do if 
we were faced with competition?' The answer often makes it very 
clear what decision should be made." Employees should be taught 
to apply the test of the possible effect of their work upon public 
relations. A number of executives testify that this serves as a posi- 
tive deterrent to the ills of bureaucracy, for it keeps men alert and 
injects flexibility into rules that would otherwise be rigid. 

A sLxth managerial corrective for bureaucracy, therefore, is an 
emphasis upon "public relations. It serves as a corrective through 
promoting decentralization, deexuphasizing legalism and providing a 
test for action in particular cases. Undoubtedly the depression and 
its attendant forces has helped to bring about increased emphasis 
along this line. However, in many of the large corporations it is still 
superficial and there is much room- for improvement. 



CHAPTER VIII 
PERSONNEL FACTORS 

The provision of progressive management. — The following discussion 
of good leadership. as a managerial corrective of the evils of bureau- 
racy is primarily concerned with direct attacks on th^ deficiencies 
of leadership as they exist and as we have described them in a pre- 
vious chapter.^ Inspiring leadership is, of course, a potent correc- 
tive for the ills of bureaucracy in the large enterprise. Indeed, it 
is probably the most important element in the determination of the 
objectives and the tone of the whole corporation. A large company 
may, because of other factors, exist for awhile without capable 
leadership, but it can scarcely be continuously successful with such 
a lack. 

The importance of leadership is recognized by both writers and 
practitioners of administration.^ One vice president of a giant cor- 
poration, for example, has laia dowai as the most important single 
rule of management: 

Get a chief executh'e who can lead; that is, create objectives, get people to' 
follow, possesses an uncom.ip.on sense of what to do and when. Great administra- 
tion is not primarily a matter of rules — they are incidental and subsidiary to 
policy. It IS the product of inspiring leadership, creating confidence and satis- 
faction on the part of employees and the public. 

Thecapable executive is the man who has ideas, who inspires others 
to help effectuate them, who is able to coordinate the work of his 
subordinates. . A few outstanding ideas often mean the difference 
between the signal success of an enterprise, and mediocrity or even 
failure. Even a cursory ex:amination of some of the large corpora- 
tions indicates their importance: serving a mass automobile market 
and the rehned use of assembly-line methods in Ford, and supplying 
farmers with a variety of products under money-back guarantees in 
the Sears, Roebuck and Montgomery Ward mail-order houses are 
obvious illustrations. Indeed, the managements of some cbm- 
panies feel that their executives are well worth their salaries if they 
get one or two good ideas in a year. 

An inspiring leader not only puts across his ideas but gains employee 
support for the continuing policies of the company. More and more 
it is being recognized that Mary Parker Follett and Ordway Tead 

' Chapter VI, supra. 

2 The limits of time and space oreclude an adequate discussion of leadership here. Among the many 
publications which have beenjvritten on the subject are; Ordway Teaci, The Art of Leadership and Human 
Nature and Management (New York: Harper, 1935 and 19291; Mary Parker Follett, Creative Experieneo 
(New York; Longmans Green, 1924); T. N. Whitehead, Leadership in a Free Society (Cambridge. Mass.: 
Harvard University Press, 19315), and "Leadership Within Industrial Organizations," Harvard Business 
Review, XIV (Winter, 1936), pp. 161-171; Marshall E. Dimock, Modern Politics and Administration (New 
York: .\merican Book Company, 1937). Ch.s. X and XI; Paul Pigors, Leadership or Domination (Bos- 
ton: Houghton Mifflin, 193,1); F. W. Taus.sig ard C. S. Joslyn, American Business Leaders (New York: 
Macraillan, 1932); E. S. Bogardes, Leaders and Leadership (New York: Appleton-Century, 1934); H. 0. 
Mitcalf, editor, Psychological Foundations of Manacement (New York: McGraw-Hill. 1927) and Business 
Leadership (New York: I. Pitman, 1931); John.son O'Connor, Psychometrics (Cambridge, Mass.: Har- 
vard University Press, 1934); H. L. Smith and L. M. Krueger, A Brief Summary of Literature on Leader- 
ship (Bloomington, Ind.: University of Indiana, School of Education, 1933). 

«5 



^^ CONCENTRATION OF ECONOMIC POWER 

have been right in their contention that power with people is more 
important than power over people. The latter, based on position 
in the hierarchy and command, too often breeds resentment and 
bureaucratic resistance. Influence with persons, on the other hand, 
leads them to identify themselves with the purposes of the enterprise 
and elicits their eager support. Red-blooded enthusiasm then 
replaces bureaucratic lethargy. 

The ability to coordinate also facilitates the efficient use of the 
enthusiasm of subordinates. Because of its varied requirements, 
however, few people possess this ability: 

It requires knowledge of all aspects of the undertaking, ability to see things 
broadly and comprehensively, facility in altering work programs and organization 
when necessary better to achieve objectives, success in delegating duties, sensitivity 
'tp faulty organization or processes, courage to upset existing arrangements irre- 
spective of whose toes are stepped on, and sustained vitality and freshness of 
outlook.' 

In view of these broad qualifications it is not surprising that one 
hears the complaint that "There aren't enough first-class executives 
to go around," or, from another source, "Second-rate management 
must often be tolerated because the supply of first-rate managers is 
now inadequate." ^ Because of this lack of leadership material, 
therefore, it is important that potential executives be deliberately 
recruited, trained, and advanced so as to use them to the best possible 
advantage. 

The obvious and probably the best source of executive material is 
from within the ranks of company employees. A man who has worked 
his way up to a position of leadership naturally has some knowledge 
of the enterprise as a whole and a detailed knowledge of at least part 
of it. Moreover, the possibility of advancement has a powerful 
influence on morale. It facilitates identification of the worker with 
the executive and serves as a stimulus to greater effort. For these 
reasons it is desirable, when more important considerations are 
absent, to promote from within the ranl^s when the proper man is 
found for the proper job. 

The techniques of uncovering talent as early as possible, however, 
must be improved and more widely adopted. Complaints such as: 
"Not .enough promising juniors are coming along," and "The right 
men are not getting to the top" demand a response and a solution. 
Varibus tests and rating systems designed to reveal .executive material 
are current, but are often primitive and the best systems are not 
generally in use. Improvements in the inventory of executive ma- 
terial are among the first needs for the conquering of the undesirable 
aspects of bureaucracy through outstanding leadership. E. R. 
Stettinius, Jr., maintains that in the trying quest for leaders — 

the crux of the situation is * * * the failure of American business manage- 
ment generally to introduce an orderly and methodical system for the discovery, 
development, and assignment of executive personnel. ■ 

We have gone on the theory that the men needed — the leaders of today and 
tomorrow — are automatically available among the millions in industry. 

But how incomplete, and how largely fortuitous are the catch-as-catch-can' 
methods that business all too frequently eniploys to find them! * * * 

It cannot be generally said that the subject of executive personnel in industry 
is given the attention which it deserves, either as to its recording, evaluation, 
utilization in current operations, availability for transfer, or as to its development 
or curtailment in long-range planning. This despite the fact that there is more 

• Marshall E. Dlmock, Modem Politics and Administration, p. 276. 

* Chester I. Barnard, CoUeciivism and Individualism, p. 23. 



CONCENTRATION OF EIOONOMIC POWER gy 

at stake and more importance to an efficient technique for inventory of executive 
personnel than there- is in routine and currently kept inventories of properties and 
product.^ 

An essential procedure in the advancement of talent is thus to dis- 
cover the potential leaders who are already on the pay roll but who 
are buried in the ranks. 

Wide as it is, however, the promotion source of executives is subject 
to Hmitations. First of all, some executives complain that "the men 
who enter at the bottom usually are dulled before they get a chance." 
Probably this can never be completely prevented, though it could be 
eased if capable men at the bottom were early identified and given 
special attention. But the process of identification is difficult, and it 
is expensive to give special attention to a large number of persons in 
the hope that some of them might have the requisite talents. 

Secondly, employees of large corporations, even including many 
department heads, are often highly specialized in skills and back- 
ground. This limits their possibilities as executives. Men with a 
broad view are indispensable for the task of inspiration and coordina- 
tion which is required of a leader; A worker who is the best of his 
group at a lathe, for example, may completely lack the qualities neces- • 
sary for the supervision and motivation of others. There may be no 
overlappnig among the requisite skills. 

The pressure for promotion on the basis of seniority may result, in 
the third place, in the advancement of men without outstanding merit 
but with long years of service. The respective claims of merit and 
seniority are difficult to resolve. Lab^r unions commonly favor 
seniority, largely because they feel that those with long service and 
membership in the union should be rewarded, because it injects an 
additional element of security into jobs, and because they do not trust 
the alternative methods of selection. But it is disastrous for a cor- 
poration to follow this policy in any wide degree. When promotion 
depends upon the calendar there is little stimulation for a man to use 
his talents to the full extent. The method thus not only advances, 
mediocrity to places of- power but in addition kills talent. Seniority 
may be given importance in layoffs and continued service and may 
also be rewarded by periodic increases in pay, but leaders are.so impor- 
tant to an enterprise that they should be chosen solely on the basis of 
merit. The proponents of seniority must be satisfied with rewards 
which will not jeopardize the welfare of the enterprise as a whole. If 
merit is early discovered, promotion on that basis usually has a better 
effect upon morale than promcHion by seniority, and in addition the 
best men will be placed where their talents can best be used. 

•Despite the shortcomings of the policy of internal promotion, the 
company's employees are the most important single source of poten- 
tial leaders. As we have remarked, it is a field which has not been 
adequately exploited, although some concerns have approached it in 
affairly systematic manner. Several of the largest, for example, have 
ra ing systems whereby present and potential executives are appraised, 
usually by their superiors though sometimes by their peers as well. 
If a 1- an rates consistently high he is investigated for promotion. In 
addition, of course, the usual method of watching men who have b'leen 
successful in cutting expenses, increasing net revenues, or otherwise 
making a good record is also used. 

'E. R. Stettinius, Jr., op. cit. 

292772 — 40— No. 11 :7 



88 CONCENTRATION OF ECONOMIC POWER 

In general^ however, the little that has actually been done merely 
serves to highlight the need for considerable refinement of current 
methods. Improvement would probably bring about a corresponding 
decrease in promotions on the basis of seniority or influence. Recog- 
nizing the need for merit at the top, one corporation official contends 
that progress in the quality and character of corporate organizations 
will depend chiefly upon the extent to which executives are intelli- 
gently selected for their work, and cease to attain positions, as they 
have in the past, largely by chance or pull.® 

Even with these improvements, the company's ranks are probably 
not sufficient for the needs of leadership in industry. It is a healthy 
thing to keep the channels of promotion open from bottom to top, 
but there is little doubt that a high level of leadership is equally 
dependent upon other sources of recruitment. Executives with broad 
as well as specialized backgrounds are required. It is difficult for a 
man to rise from the ranks by his own eft'orts and to obtain the 
required breadth of vision in the process. Special sources of recruit- 
ment and special methods of training are therefore indicated. 

In some respects the executive is analogous to a queen bee. 
Some bee larvae develop into drones regardless of the diet on which 
they are raised. However, whether other larvae develop into workers 
or into queens depends upon whether they are fed a plain or a special ' 
diet. Similarly among corporation employees only a limited per- 
centage is potential executive material.'' These few, however, must 
be fed a special diet'in the form of background and training, especially 
while they are sufficiently young to profit by it, in order to become 
effective leaders. Otherwise, while they may remain good workers, 
they will not develop the necessary qualities of the first-rate executive. 
In recognition of this need, some of the large corporations have 
adopted special procedures which are designed to obtain men with 
the desired background. Training schools, for example, have been 
established which employees with interest and initiative may attend 
and learn of matters beyond the confines of their owai narrow jobs. 
More commonly, however, executives in the large companies are 
recruited from the colleges and technical schools. In this way, much 
of the broad training and a correspondingly valuable attitude of mind 
has already been acquired by the candidate before he is hired. Some 
officials state that not only do they obtain their executives in this way 
butr that they prefer the smaller colleges, whose graduates are likely 
to be less specialized than those of the large universities. 

Tliis practice of recruiting potential executives from the colleges 
is widespread among the giant corporations. For example, the per- 
sonnel director of a Nation-wide corporation employing '■over 100,000 
persons, observed in an interview that there were only a couple of 
outstanding, up-and-coming young men in that concern who did not 
have a college education. One company has hired as many 'as 3,000 
college men in 1 year. They naturally wish to keep these men on a 
permanent basis, for the expense of recruitment and the investment 
involved in special training is high. One executive commented that 
out of 400 .college recruits in Ms company, 85 percent had been 
retained, 10 percent were failures and only 5 percent which they 

. 'MalcomC. Rorty, "Men Not Things," Bulletin of the Taylor Society, XV (April 1930), p. 99. 

'Chester Barnard estimates that not more than 10 percent, of the population has the potentialities for 
managing affairs. Collectivism and Individualism, p. 24. 



CONCENTEATION OF ECONOMIC POWER 89 

wanted to keep had gone elsewhere. These college men are commonly 
started at the bottom of the liierarchy but advancement may be rapid. 
In tills way specially qualified recruits are brought into the corpora- 
tion and are trained by experience in a number of lesser jobs, retaining 
the time-tested system of starting at the bottom and working up. 

Small companies also serve as a source of executive material for the 
larger concerns. Here potential leaders may gain a broad background 
in a relatively short time. Many executives in the large corporations 
who have themselves come from smaller concerns, however, prefer to 
develop their own talent, starting with relatively young men. More- 
over, it is undoubtedly good for nioralre to recruit from- within the 
company when possible. Nevertheless, when fresh, red blood is 
needed, managers should not hesitate to go outside the company to 
get it. It may have a healthy, rejuvenating effect which will help 
to offset stagnation. They should also draw .on outside men when 
there are no qualified candidates within the enterprise. One of 
Henry Kendall's 10 commandments for the cotton industry is capable 
of rather wide application: "Thou shalt exalt competency of manage- 
ment before all else, and welcome young red blood into the industry, to 
do things, not the way they always have been done but in the one 
best way." ^ In other words, neither door to promotion should be 
closed. 

Once a young man has been taken into a company the process of 
turning hun into an executive has just begun. His natural qualifica- 
tions must be supplemented and developed through a program of 
training. 

The training of executives takes various forms. In those corpo- 
rations where serious attention is paid to the process, the general 
pattern is somewhat as follows: The recruit is tsually given at first 
a simple job at a small salar5^ Supplementing this may be a series 
of informal conferences on operating and administrative problems. 
Regular courses have' often been dispensed \vith, partly because the 
recruits have just come from college or the company training school 
and are weary of classes. Varied experience is then provided b}'' as- 
sig;ning the men to a series of small positions in order to .give them 
background and to discover further their special likes and qualifications. 
Finally they are placed in posts of some degree of responsibility and 
it is up to them to demonstrate their capabilities. 

In some companies this tour of duty idea is continued even after 
the men have reached responsible jobs. In addition, allowing am- 
bitious and capable executives a considerable degree of discretion and 
responsibility helps even those who are already on the way up. 
Statements -such as "Nothing so much develops individuals within 
the limits of their capacity as responsibility," and "Local managers 
should be permitted to make mistakes; what we're interested in are 
results; if they've got the stuff they'll deliver under such a system," 
illustrate the faith of some managers in the efficiency of freedom of 
action in developing executive material.^ As one corporation official 
has said: 

Experimentation and change always cost money, but a skilled executive will 
always permit an occasional experiment to be undertaken, even though In his 

' Given before a convention of the Xational Association of Cotton Manufacturers and reprinted in the 
Christian Century, XLVII (July 30, 1930), p. 941. 

' See also W. J. Donald, Handbook of Business Administration (New York: McGraw-Hill, 1931), pp. 
1499-1501. 



90 CONCENTRATION OF ECONOMIC POWER 

own opinion it is clearly foredoomed to failure, rather than have the impression 
spread throughout the organization that no suggestions for changes in methods 
will be welcome."* 

Both increased interest and valuable training can also be acquired 
by promising yoiing men if they are allowed to share, if only in a 
limited manner, in the determination of corporation policies. Some 
of the potentialities of such a plan have been amply demonstrated by 
trial." 

Despite what has been done in some instances, however, many of 
the large corporations may be justly criticized for paying insufficient 
attention to the building of executives. Through sheer inertia on the 
part of management, the future leader must too often take all the 
initiative. It is tliis process that so often results in having good men 
"dulled before they get a chance." 

An additional requirement of progressive management is that pro- 
motion shall be relatively rapid for qualified men. This naturally 
depends upon the early discovery of talent, and, as we have already- 
pointed out, a further refinement of the methods of discovery is 
mdi'cated. Thereafter, an attitude of miiid "on the part of those in 
control is necessary in order that a promising man may. be advanced 
before he gives everything he has to a particular job. 

Kapid advancement is essential for two main reasons: First, men 
with unusual qualifications may become dulled and discouraged if 
confined too long in one position; and second, the many steps in the 
hierarchy of the giant corporation require that one who is destined to 
reach the top shall not be unduly delayed at any stage. If he is, he 
will be too old at the end and his term of office will be too short for 
the corporation to gain the maximum benefit from the use of his 
talents. An .executive who' is able to rise only part way might, of 
course, be advanced at a slower pace. But in all cases it is essential 
that men reach their peak of usefulness substantially prior to retire- 
ment. "Let those who can run fast go ahead," or "We keep shoving 
them klong," are statements which illustrate the attitude of some 
thoughtful managers with regard to promotions. 

Without exhausting the elements of progressive management it 
may be said, finally, that the incentives in any company must be 
adapted to the development of leadership. Outstanding leaders may 
be thousands of dollars more valuable to a company than mediocre 
men. Likewise monetary reward is a powerful stimulus not only 
because of the purchasing power of money itself but because income 
is an important criterion of prestige. The twin facts of worth and 
incentive, therefore, result in wide agreement on the proposition that 
capable business leaders should be substantially and liberally remu- 
nerated. There is less accord, however, as to just how much this 
remuneration shall be and in what manner it shall be paid. 

Some interesting questions may be raised. For example, is the 
head of Lever Bros., soap manufacturers, or of International Business 
Machines each worth over twice as much to his company as the head 
of the world's largest private corporation, the American Telephone 
& Telegraph Co., is to that company? No one can contend that the 
salary of the last mentioned, over $200,000, is not substantial. Or 

'0 Malcom C. Rorty, op. cit. • . 

" See Charles P. McCormick, Multiple Management (New York: Harper, 1938), for a description of the 
plan used in his company. For a summary, see his "Multiple Management," Society for the Advancement 
of Management Journal, III (January 1938), pp. 38-39. 



CONCENTRATION OF ECONOMIC POWER 91 

again, can the contributions of leaders be at all accurately determined? 
The profits of an enterprise are commonly considered a good indication 
of managerial proficiency, but profits are probably still more dependent 
upon general business conditions. Many executives have worked 
harder and contributed more to their companies during the depression, 
when profits were meager or absent, than they did in more prosperous 
times. "Executives are customarily paid fc rxercising good judg- 
ment, formulating broad policies, and makmg other immeasm'able 
contributions." ^^ Because of these and similar factors, therefore, 
incentives directly related to what is desired of an executive are diffi- 
cult to determLi;ie. 

Thus, a primary need is. the development of criteria for measuring 
executives' contributions. F. P. Poole has found, for example, that 
the frequent lack of even essential operating statistics was responsible 
for man}^ makeshift compensation plans. '^ But even under the most 
objective plans that might be developed, a subjective appraisal is 
equally necessary in order to evaluate an executive's relative worth. 

A number of companies have adopted special bonus plans to stimu- 
late their executives. Profits serve as a common criterion of extra 
compensation, but are widely supplemented by appraisals of worth on 
other bases varying from fairly simple percentages of quotas or per- 
formance standards to rather vague judgments on "special services," 
"industry and fidelity," or "outstanding service." Indeed, in some 
companies regular salaries plus bonuses are so substantial that favored 
managers may become millionaires. ^^ 

The managements of other concerns feel that bonuses are not 
particularly desirable. Executives comment: 

Enormous executive bonuses are utterly inexcusable. They were the "growing 
pains" of industry. Thej^ were paid at a time when everyone was trying to take 
all he could while the taking was good. 

or again— ^ 

Bonuses are indefensible. . Profits are not a reflection of managerial ability to 
any considerable extent; they are due to general conditions — high during pros- 
peritj^ and low during depjession. But men have to work harder during the . 
periods of depression. 

After analyzing a number of bonus plans, F. P. Poole decided that 
many were improperly set up. He contends that in any such plan 
it is essential — 

that participation should be proportionate to responsibility. In any business, 
the performance of one individual may affect the results of his division only, 
while the performance of another may affect the business as a whole. The 
choice of the plan should be influenced by this consideration. * * * fj^e 
reward for each should be mostly in terms of factors over which he has positive 
control. For this reason, profits should rarely be one of the base factors for any 
but the highest executives. '^ 

In his list of factors to be considered in gra^iting extra compensation 
at various executive levels, most of the item;, are not based upon 
profits. Perhaps the most interc^sting paro of his study is his con- 

" John C. Baker, Ewcutive Salaries and Bonus Plans (New Y iri : McGraw-Hill, 1938), p. 236. 

" F. P. Poole, "How Much is an Executive Worth?" Factf y and Industrial Management, LXXX 
(November, 1930), p. 937. 

>* For example, in discussing Du Pont bonuses Fortune says: T le Du Pont man who rises high enough 
to be in touch with the members of the family— to be almos: a nember of the family — may become a 
management millionaire. Just as the same possibility exists ir neral Motors, with its strong Du Pont 
and Raskob influence." Fortune, X (December 1934), p. 188 I ir a discussion of salary and bonus pay- 
ments including their relation to Income of classes of large cc .pi rations and of specific' corporations, see 
John C. Baker, op. cit. 

" F. P. Poole, op. cit., pp. 938-939. 



92 CONCENTRATION OP ECONOMIC POWER 

elusion, at which he arrived only after sympathetically examining 
many plans: 

The greatest value of the executives' bonus plan comes, not from the incentive 
feature, but from the fact that, if properly devised and set up with the right 
determinants, each executive visualizes the vital factors of his job more clearly, 
and thinks and acts along correct lines. '^ 

This supports that group of managers who believe in establishing 
control systems along the lines mentioned earlier in this chapter, and 
then giving their executives security and reward through promotions 
and appropriate salaries. But it is only a small group. The wide 
variations which erist in executive compensation in the different 
companies indicates 1 1 .ck of settled and well-considered plan. 

In any case, it is widely recognized that the bonus is only one of 
the several stimuh which may bring out a man's qualities of leadership 
and aggressiveness. Financial encouragements are probably the 
most important, at least to a certain point. But some executives 
believe that "the financial incentive shrinks relatively the higher up 
you go." Other stimuli play a part at all levels. Several executives 
maintained, for example, that fear was one of the most powerful 
spurs to improved management and vigorous effort. "There is no 

sentiment or humanitarian regard in the business," one 

official rem.arked. "Fear is the chief incentive. Men produce 
because otherwise they go out." In comparing the relative potencies 
of fear and bonuses, John Baker comments: 

It is doubtful if the disappearance of bonus payments between 1931 and 1935 
in anyway affected the work or interest of executives, many of whom broke 
physically under the terrific strain of the period. It is also doubtful whether 
the largest bonuses ever drove officers to work so hard or created such interest 
as did the disappearance of earnings and the fear of failure of their companies 
during the period of the great depression. * * * In periods of little or no 
earnings, executives may be making their greatest contributions to corporate 
success and in such periods bonuses are not typical.'^ 

Other incentives are equally important. WiUiam James observed 
years ago, for example, that rivalry does nine-tenths of the work of 
the world. ^* Rewards and measurem.ents of performance in other 
than financial terms can direct this force into nonmonetary channels. 
Many of the greatest corporation leaders appear satisfied so far as 
money is concerned and crave personal distinction instead. Honors, 
therefore, have a place on the list of incentives. Men also desire 
to work for groups that are "doing things." Perhaps the best proof 
of this is the flood of talent which was placed at the disposal of the 
Federal Government in the crises of 1917 and 1933. A corporation 
with an aggressive program can open up well-springs of initiative 
which are closed to less intrepid concerns. Pride of craftsm.anship — 
doing a good job — is as prominent a factor in the make-up of an 
executive as in that of an old furnitm-e maker. A good system of 
measuring performance will take advantage of this force and point 
to the elem.ents of a good job. Loyalty to a superior, a group, or a 
company also plays its part. Executives will work hard for m.en they 
like and respect. They become more easily attached to people than 
to ideas or inanitnate sym^bols. Because of this an official who earns 
the respect — perhaps one mjght say the affection — of his subordinates 
is able to command a performance which would otherwise remain 

>• Ibid., p. 939. 

«' John C. Baker, op. cit., pp. 221, 236. 

'WVilliam James, Psychology, vol. II (New York: Henry Holt, 1925), p. 409. 



CONCENTRATION OF ECONOMIC POWER 93 

dormant. Likewise a man will work for his particular group if there 
is a strong bond among its m,embers. This is also true, though 
probably to a less extent, for the members of a corporation as a whole. 

Finally, we should mention an incentive device which unfortunately 
is only too rarely used in business. It is part of the control system 
but deserves special mention. In some companies a record is kept of 
the fate of the subordinates of particular officials. It is recognized 
that an important aspect of an executive's job is to develop the staff 
he supervises. If good men become buried, it is a mark against his 
record. If, on the other hand, they become executives themselves, 
the role of their superior in training them is recognized and considered 
in promotions, raises, or other methods of reward. This helps to pro- 
vide the company with a steady stream of leaders and counteracts 
the all- too-prevalent tendency to confine,good men to inferior positions 
so that their talents may be reflected in the faverable performance 
records of their respective chiefs. 

From this cursory survey of executive resources and incentives, 
several things are apparent. These resources, essential and limited 
as they are, do not receive the attention they deserve. Efficient 
methods are available and should be more widely adopted. Promotion 
from within on the basis of merit, and special recruitment from colleges 
and smaller companies, should be judiciously fused to maintain a 
steady supply of qualified men rising to the top. Training systems 
should be more universally established in order to develop the qualities 
of potential executives. Advancement should be sufficiently rapid for 
men to reach their peak positions while they retain the spark of en- 
thusiasm and invention so essential to inspiring leadership, and they 
should remain in these jobs long enough to make full use of their 
capabilities. Monetary and nonmonetary incentives are many and 
varied. Much room for improvement lies in eliminating the waste- 
fulness of poorly developed monetary incentives and in making better 
use of supplementary stimuli. Care should be taken, however, lest 
the latter become an excuse for withholding adequate financial re- 
ward. Leadership is so essential in the fight against the undesirable 
effects of bureaucracy that all available administrative means should 
be employed to develop it. 

The attainment of high morale. — Closely related to the problem of 
insuring effective leadership is that of creating and maintaining a 
high level of morale among the rank and file of employees. The 
measure of effective leadership is enthusiastic response directed 
toward common objectives. Without this response, workers settle 
into small bureaucratic groupings of their own devising. Interest 
in the affairs of the company is lost along with efficiency. "Morale," 
said a brigadier general, "is a term which should be used to express 
the measure of determination to succeed in the purpose for which 
the individual is trained, or for which the group exists. It describes 
the nature and degree of cooperation, confidence, and unity of under- 
standing, sympathy, and purpose existing between the individuals 
composing the group." '® 

Properly utilized, most of the managerial correctives of the evils of 
bureaucracy which we have discussed help to build morale.^ If this 
were not so, th^Y would have little effect a« correctives. Output can 
be maximized /ordy through the efforts of the rank and file, Manage- 

'« Edward I-. Munson The ,Management of Men (New York: Henry Holt, 1921), p. 3. 



94 OONCENTRATION OF E<X)NOMIC POWER 

ment's duty ig to see that those efforts are forthcominfi:, they they are 
directed into the most productive channels, and that they are coordi- 
nated. Since morale stimulates output and serves also as an indicator 
of worker satisfaction (which is of some importance in a democracy) 
it is essential that it be fostered. The improvements in management 
which we have mentioned are essential, but a more direct attack on 
the problem is also indicated. 

Stated simply, the problem of raising morale is that of giving labor 
what it wants ^^ in such a way as to improve efficiency, unity, and en- 
thusiasm. Morale thus requires first an analysis of labor's desires 
and then a prescription to satisfy them. Without the analysis the 
prescription will be wasteful and ineffective. And, strangely enough, 
in view of current emphasis on research and the processes of cause and 
effect in handling inanimate things, corporate management has prob- 
ably been more superficial in its corresponding analysis of human 
causes and effects than in almost any other phase of its duties. The 
improvement of personnel relations too often constitutes something 
to be undertaken when other matters are not pressing. As one exec- 
utive put it, "Our company has failed to anatyze the basic complaints 
and desires of labor. They have tried superficial controls without 
knowing what they were trying to control." 

The concept of labor as a commodity or a cost of production, and 
of labor-uni(in activity as somehow subversive and un-American, has 
clouded corporate thinking and made analysis difficult. When labor 
is placed on the balance sheet it is hard to see that the figures represent 
human beings with desires, likes, and dislikes little different from 
those of the managers themselves. This has been recognized by a 
number of -men with varying backgrounds but it still has not pene- 
trated deeply enough into the thinking of most corporation officials. 
The late Boston merchandiser, E. A. Filene, has said — 

It was universally supposed * * * that labor was a commodity. Neverthe- 
less, labor could not and did not act like a commodity. It acted like human 
beings. It acted, in fact, from much the same motives with which employers 
acted, and not even the most dismal economist supposed that employers were 
commodities.'^* 

A labor leader, Robert J. Watt, expressed a similar idea in his speech 
. before the most recent International Management Conference: 

Labor is but a group term for working people. They are people like your- 
selves, with the same desires to earn a decent living for their families, in self- 
respecting jobs which they can enjoy. They may not be so sophisticated as 
executives usually are, and especially in terms of leadership our officers may ap- 
pear crude in their inability to use 50-cent words to express their grievances and 
their programs. But you can solve our community problems only by viewing 
labor as a mass movement of individuals with the same sort of hopes and feelings 
and needs as yourselves.22 

The working man thus wants to be "geared into the culture of our ■ 
time." His desires are those prevailing in a democratic America. f 
What, then, are some of the current desires of the people of this 
country which find expression and hope of satisfaction in industry? 

'"An answer to the question "What does labor want?" was briefly given by Marshall E. Dimock in 
a speech before the Industrial Management Society, Proceedings of the Wage Conference (Chicago, Apr. 
8, 1939), pp. 71-78. The analysis of Robert Hoppock in his book, Job Satisfaction (New York: Harper, 
1935') , is also of interest. 

" E. A. Filene, Successful Living in This Machine Age (New York: Simon & Schuster, 1931), p. 20. 

'2 Robert J. Watt, Labor's Aims and Responsibilities, in Proceedings of the Seventh International 
Management Congress (Baltimore: Waverly Press, 1938), pp. .')8-61, 60. 



CONCENTRATION OF EXX)NOMIC POWER 95 

Workers, like people in general, desire security. This means, 
among other things, steady employment with a minimum of industrial 
hazards, at an adequate wage that will provide the things that are 
commonly accepted in the American standard af living, without con- 
tLQued worry least they be cut off. On the other hand, security in 
America does not mean class and economic stratification. It con- 
notes, rather, a stable base from \vhich those with the desire may climb 
as far as they are able. The fluctuations in pay rolls and employ- 
ment of the last decade and the extent of labor turn-over which we 
have examined are strildng indications that security in even the first 
sense has not yet been attained in this country. 

Security also has a less recognized jjsychological aspect. Like other 
men, laborers are by nature gregarious and tend to congregate in 
groups. These may vary in size from the men at a particular bench 
or workroom to a formal labor union. They have the natural and 
human desire to preserve themselves. As T. N. Whitehead has 
pointed out, "A group will resist any outside threat to. its own in- 
tegrity by withdrawing into a self-made shell, and so ceasing to col- 
laborate effectively with the larger society around it." ^^ 

Management must recognize these needs of the worker for security 
and must use available administrative techniques to guarantee it. 
Regularizing work and minimizing lay-offs is one method ; some form 
of a guaranteed annual wage such as has been adopted by a few pro- 
gressive companies, is another. Guarding against industrial hazards 
has had a considerable effect upon morale in several industries. 
Some executives maintain that limiting the firing power of foremen is 
a great help. Techniques which place workers on a more equal 
plane with management in bargaining power also assist in increasing 
security and improving morale; recognizing and using employee 
groups gains cooperation and dispels fear and resentment. Improved 
systems of selection and training, in place of the haphazard methods 
which are often followed, can further security by obtaining and 
adapting workers who are fitted for particular jobs. 

It must be understood, of course, that no corporate management 
either should or could provide for complete security to all workers. 
Incompetents must be subject to removal, or morale as well as produc- 
tion will suffer. Insecurity for incompetence which is accurately 
ascertained is no hindrance to morale and it is essential to the con- 
tinued existence of the corporation. But all available methods should 
be employed to protect qualified workers. Few corporations have 
as yet achieved this goal. 

In addition to the universal desire of Americans for security, there 
is our tradition of "getting ahead." This urge is encouraged" atjiong 
managers; it should be no surprise that it exists among workers. 
Not everyone, of course, likes responsibility and so may not seek 
promotion. But every worker wants more income and a share in 
the fruits of whatever increases in production there are. Use of the 
speed-up whereby added productivity goes unrewarded is naturally 
resented. The favorable effect, on the other hand, of a few small, 
periodic increases in wages for those who merit them, is sometimes 
surprising. 

" T. N. Whitehead, "Leadership Within Industrial Organizations," op. cit., pp. 163-164. 



gg OONCEN'TRATION OF E-CONOMIC POWER 

Happily for management, workers are not in general insistent upon 
added benefits if the corporation does not have them to bestow. 
Showing labor representatives the balance sheet has often forestalled 
demands for increases which could not be met. In fact, under certain 
circumstances, they may voluntarily take less. For example, in 1932 
a railroad president who had a reputation for fair dealing persuaded 
the unions to agree to a voluntary wage cut which saved the railroads 
tens of millions of dollars. Like most Americans, workers are 
essentially fair when fairly treated. 

Besides security and improved circumstances, workers want non- 
discriminatory treatment. A sense of equality is an important 
part of the American tradition. Because this is so ingrained we 
resent it when undeserving persons receive favors. Many discerning 
executives point out that it is important to treat all alike — that is, 
without favoritism. From the informal side, management can in 
part guard against discrimination by the careful selection and training 
of foremen. The acceptance and use of grievance committees to 
report cases of unjust treatment also helps. More formally, the 
analysis and classification of positions so that equal work and respon- 
sibility brings equal pay is of great value in preventing discrimination. 
Schemes to discover merit which is to be rewarded by promotion or 
increased pay, without placing undue emphasis upon the opinions of 
single supervisors, are also useful. Workers distrust appraisals 
which are too dependent upon the likes and dislikes of one man. 
Personal ratings cannot, of course, be dispensed with but they should 
be supplemented b}^ objective measurements in which the workers 
have confidence. If they like the system, their emphasi« upon senior- 
ity and other rigidifying devices can be reduced. On the other hand, 
management must take care less nondiscrimination becomes a rigidi- 
fying nonrecognition of merit. 

Finally, there is the effect upon morale of the desire for recognition. 
Psychologists commonly list this as a universal urge. It is a part of 
our American tradition, with its emphasis on the worth of the indi- 
vidual. As a fundamental need, therefore, it is shared by workers as 
by other Americans, including management. . 

Labor's desire for recognition has two principal phases. First, 
workers want to be treated as human individuals, not as cogs or the 
cold costs of production. Secondly, they wish to participate in the 
m.anagement of aft'airs which closely affect them. 

The first is a simple enough desire. We all want appreciation, to 
be known by nam.e and face rather than number and job. The worker 
knows he is as human as his supervisors — that he is more than a com- 
m.odity or a m,achine — and resents the fact that others sometimes 
forget it.^^ Some observing m.anagers state that "it helps out enor- 
mously in handling personnel if you personally know the employees." 
Even so simple a thing as calling a m,an by name warm.s his spirits 
and raises m.orale. The head of a large enterprise cannot, of course, 
know all the employees in the company. He can, however, see that 
the personal touch prevails, that foremen are not Legrees, that execu- 
tives are not a species apart, that personal problems are handled in a 
personal way. Sincere democratization of attitude is essential to 

2' Despite their limited e.\tent, the WestMB Electric experiexnnts clearly illustrate the importance of 
hun'aii responses on morale and productivity. For a summary of these see L. J. Henderson, T. N. White- 
bead, and Elton Mayo, "The Effects of Social Environment," in Qulick and Urwick, op. cit., eh. VEC. 



CONCENTRATION OF ECONOMIC POWER 97 

high morale in American industry. Power mth is more satisfying 
and in the end more productive than power over. 

The second aspect of recognition, participation in management, 
causes some trepidation among executives who do not recognize its 
true nature! Businessm,en are understandably and justifiably re- 
sistant to any attempt to divide and diffuse the unity of management. 
What they som.etimes fail to realize, however, is that workers do not as 
a rule wish to assume any such responsibility. \'\rhat they do want 
is that their viewpoint be considered when policies are formulated and 
decisions reached which are of immediate concern to them. They' 
desire cooperation rather than control. Friedrich and Cole, in their 
monograph on bureaucracy, have aptly said: 

To repeat here a fundamental if somewhat platitudinous truth, a group of 
human beings is not willing, except in certain cases of extreme emergency, to be 
treated like dumb animals. Whether or not their material "interests" are taken 
care of a little better or less well does not matter to them in comparison with 
whether they feel that they have had a chance to participate in deciding what 
those material interests are.^^ 

Moreover, convinced that they have had a part in creating the profits, 
they wish to share in whatever prosperity the company may «^njoy. 

Mutual confidence rests upon an exchange of inforniation and 
viewpoints and upon the beli6f that the other side will play fair. 
As one corporation executive has pointed out, "The best way to get 
labor's confidence is to show them the books. Most average businesses 
earn only a small margin, if any. Smart employers will make this 
fact known." If management and labor are each educated in the 
viewpoints and problems of the other, the result will be a workable 
collaboration rather than m.utual recrimination and loss of morale. 
The cash dividends of as sim.ple and costless a thing as a constructive, 
understanding attitude m.ay be surprising. With cooperation, the 
objectives of the com,pany become the objectives of all who work for it. 
Thus, with enthusiasm and singleness of purpose, the shackles of 
bureaucracy may be broken and the personnel as a working whole 
may become truly efficient. 

Wise management will recognize these potentialities. It will take 
advantage of its peculiar position to initiate programs of cooperation. 
For, as a labor leader has aptly said— ^ 

Management can determine the sort of leadership which Labor provides because 
you determine whether we must plead our cause by force or by reason. Give us 
conference table discussion of honest issues and you will get that kind of leader- 
ship. If you give us the Mohawk Valley formula, you will get militant unions 
with fighting leaders. If you give -guns and gas to meet our grievances you will 
get the sit-down strike and the flying squadrons. You cannot breed respect and 
confidence by the stool pigeon and labor spy. Every union which you smash by 
force and deceit will be succeeded by a tougher, harder union ready to match 
itself against your tactics." ^^ 

Cooperation counteracts the ills of bureaucracy and pays dividends, 
particularly over the long run.^^ Conflict is divisive, wasteful, destruc- 
tive of morale, and productive of a sullen bureaucracy 

" Friedrich and Cole, op. cit., p. 88. 

M Robert J. Watt, op. cit. 

" The mutually profitable, coonerati ve labor-management relationship of the last quarter century between 
Hart, Schaflner & Marx and the Amalgamated Clothing Workers is a case in point. The head of the union 
has pointed out that "American industrialists may well look to this record of uninterrupted, regulated 
industrial relationship, with not a single strike or otherwise upsetting disorder, as a harbinger of what 
the future has in store for us if only we determine to set reason above ataTism."-^ — Time, XXIX (April 19, 
1937), p. 78. For a recent detailed statement of the potentialities of labor-management cooperation, see 
Morris L. Cooke and Phillip Murray, Organized Labor and Production (New York: Harper, 1940). 



98 



CONCENTRATION OF ECONOMIC POWER 



Basic to good morale and its benefits is the attitude of mind which 
employers must assume. They must think of workers as human 
beings like themselves — not costs, commodities, cogs, or even pets. 
As Ordway Tead has said, "Our Koehlers and our Hersheys of varying 
degrees of paternalistic kindliness, must surely have come to see that 
theirs is no adequate answer to what the human spirit seeks in our day 
in our land." ^* Good management does not need to be soft — in fact, 
it would lose labor's respect if it were — but it does need to be human. 

In order to improve morale and thereby counteract the undesirable 
effects of bureaucracy, management, then, needs to recognize what 
the actual desires of workers are, to provide as much security for 
meritorious men as is feasible, to allow labor an opportunity for 
advancement either through promotions or moderate increases in pay, 
to treat workers justly and without illogical discrimination, and to 
recognize that they are human, to treat them as such, and to allow 
them to participate in the formation of decisions and policies which 
vitally affect them. It must be understood, however, that the 
recognition of workers as human beings is basic to all other require- 
ments and is the foundation upon which all other policies must be 
built. Otherwise, sincerity will be absent and improvement in morale 
will not be forthcoming. 

" Ordway Tead, "Industrial Relations 1939 Model,'' Personnel Journal, XVII (November 1938j, 
pp. 160-67. 



CHAPTER IX 
COMPARISON AND SUMMARY 

Implications for governmental bureaucracy. — Because the problems 
are similar, most of the managerial correctives of the ills of bureaucracy 
which we have discussed are applicable to both government and busi- 
ness.' In general, they can be as effective in one type of enterprise 
as in the other. Some methods, however, are more readily applied in 
public than in private administration while others are virtually useless 
because o^ peculiar handicaps which exist. 

The definition of objectives, responsibilities, and authority is 
probably carried as far in government as in business. It is a difficult 
process because neither the people nor ' their representatives has a 
clear idea of the purposes of government. Nevertheless, through 
creative enactments and the annual budgetary process, considerable 
clarity of definition may be and is in practice attained. The periodic 
re-examination of policies and practices, however — preventive main- 
tenance applied to administration — is at least as rare in government 
as in business, although the potentialities of this technique are high 
in either field. 

Standard practices and instructions are of course used both in 
government and in business enterprises. In government, however, 
there is even more emphasis upon legality — the necessity of following 
rules — than in business. This preoccupation with legality, often at 
the expense of effectiveness, is an outstanding characteristic of public 
administration. Lawmakers are more often lawyers than members of 
any other calling, and it is natural that they should emphasize rules. 
There is more joy among the opposition over one instance of doubtful 
legality than over 99 cases of inefficiency. This makes it difficult to 
give results their proper importance. 

Aside from the rigidity which accompanies it, legality, makes elec- 
tive decentralization difficult. Although our Federal system allows a 
considerable degree of decentralization, many sma;ll matters must still 
be referred tothe central office.^, Some change in emphasis is indi- 
cated, therefore, if the bureaucratic pressui^e of legalism is to be coun- 
teracted. 

Government might also improve its methods of internal coordina- 
tion and control. The profit measure of efficiency is largely absent 
here, but ^ other devices are available. A :Cbnsiderable portion of 
governmental activity, particularly that of a routine nature, may be 
reduced to units and measured.^ This method cannot be carried so 

> Our purpose here is merely to emphasize the generic character of bureaucracy.; Comparison is the best 
method of making common characteristics stand out. No attempt will be made to deal in detail with 
bureaucracy in government. 

J Cf. Jacfies W. Fesler, "Executive Management and the Federal Field Service" in the President's Com- 
rti'ttee on Administrative Management, Report With Special Studies (Washington: Government Printing 
Office, 1937), pp. 275-294. 

' See the collection of papers, The Work Unit in Federal Administration (Chicago: Public Adminis- 
tration Service, 1937). 

99 



IQQ CONCENTltATION OF ECONOMIC POWER 

far as in industry, however, because of differences in the types of 
work performed. The over-all cost of government, for example, is 
of little value in appraising its worth or efficiency. A police force 
on a small budget may do a very poor job of law enforcement. 

Internal coordination in government could be substantially im- 
proved if there were more continuity of leadership at the upper levels. 
A rapid turn-over at the top has the effect of segregating the various 
subdivisions, thus preventing their integration into a unified whole. 
Less volatility of leadership would help to build a system and habit 
of unified, cooperative action. 

The technique of public relations can be as effectively applied in 
government as in business. The tradition that it is undignified or 
. even dangerous , for government to recognize public desires and to 
advertise its own merits is disappearing, and experts on public rela- 
tions are coming to be regularly employed.* This is but one aspect of a 
growing appreciation of the importance of public satisfaction. The 
emphasis could be extended to the inner portions of the governmental 
bureaucracy with beneficial effects. The public-service incentive is 
strong but it needs to be expanded, channelized, and supplemented 
by other direct emphases. 

Government should likewise improve the caliber of its managers. 
In order to attract and hold good men it must continue to be kn agency 
which is "doing things." It must also pay higher salaries to men of 
exceptional capabilities. This would tend to put a stop to the present 
business practice of buying outstanding talent from governmental 
units which badly need it. 

In improving morale among the rank and file of employees, govern- 
ment could make the surest ady;ances through a fundamental change 
in its attitude toward personnel work. The negative emphasis of 
"keeping the spoilsmen out" should be shifted to one of attracting, 
developing; and keeping good men in. It is personnel work beyond 
the recruitment stage which should be given emphasis. This shift in 
attitude would include the adoption of a number of improved per- 
sonnel practices which we cannot here discuss. 

Many of the techniques which are available to business in counter- 
acting bureaucracy are thus also available to government. It too 
can benefit from a clearer definition of objectives, the application of 
preventive maintenance to administrative policies and practices, the 
stressing of results, improvements in devices and underlying condi-- 
tions of effective coordination and control, decentralization, an em- 
phasis upon public relations, provision of more capable managers, and 
the adoption of attitudes and practices directed toward improving 
morale. Just as the problems are largely similar in government and 
business, so also are the solutions. 

Nevertheless, in some respects government is more hampered than 
business in the apphcation of correctives to the undesirable effects of 
bureaucracy. There are the several traditional and organizational 
handicaps which we have mentioned, such as a lack of emphasis on 
administrative unity, the separation of powers which promotes jealousy 
among branches of the government, the fact that each bureau has its 
own supporting clientele, an undue emphasis on legality, and low sala- 
ries coupled with insecurity of tenure for men at the top. In addition, 
in State and local governments the direct election of many adminis- 

' See James L. McCamy, Federal Publicity (CJiicago: University of Chicago Press, 1939). 



CXDNCENTRATION OF ECONOMIC POWER IQl 

trative officers often deemphasizes the need for coordination among 
them. Finally, the variety of governmental work results in the crea- 
tion of an organizational structure with so many units at each level 
that one executive cannot effectively coordinate the activities of his 
too numerous subordinates. 

On the other hand, government also has advantages which business 
does not enjoy. It is able, for example, more readily to utilize certain 
incentives which strongly appeal both to leaders and to the rank and 
file. The elements of prestige, of appeal to service and patriotism, 
and of belonging to an agency that is "doing things" (or, at least, has 
been for the past decade), serve in large part to counteract the handi- 
caps of lower salaries and shorter tenure for the top men. These same 
incentives apply also to the rank and file. In addition, it is easier in 
government to promote security, nondiscrimination, and better hours, 
wages, and working conditions at the lower levels of the hierarchy. 
They fit in with democratic tradition. 

Thus in the application of correctives for the ills of bureaucracy, 
government has both handicaps and advantages when compared with 
business. Although the net result is difficult to determine, it is prob- 
able that the handicaps of government "are slightly greater than those 
of business, though there are many exceptions. A device such as the 
government corporation which can draw on the useful traditions of 
both governn^ent and business holds some promise in counteracting 
bureaucracy, particularly in the provision of economic services.^ It is 
clear that the successful application of antidotes \requires not only the 
direct use of appropriate techniques but changed traditions as well. 

Summary and recommendations. — The factors contributing to the 
evils of bureaucracy are nimnerous and varied ; so also are the admin- 
istrative antidotes with which to combat them. The problem is so 
complex and pervasive that no simple, single remedy is adequate. 
While it is true that some correctives have rather general effects, 
others have quite specific results. Although in our discussion of these 
remedies we" have not exhausted the list, we have mentioned those 
which are the most important and are capable of the broadest appli- 
cation. 

The unresponsiveness, divisiveness, and inflexibility of business 
bureaucracy may in part be corrected by the various means which 
we have considered. A reasonably clear definition of objectives, 
responsibilities, and authority will help to direct the efforts of all 
members of an enterprise toward common goals and to minimize the 
confusion and jealousies resulting from hazy conceptions of who is 
to do what. The attitude, "We don't know where we're going but 
we're on our way," must be supplanted by a clear knowledge of goals 
and spheres of activity. ^ 

Ossification of administrative methods and goals could be largely 
prevented by a thorough, objective reexamination of them at periodic 
intervals instead of only in times of crisis. TJie idea of preventive 

• A rather considerable body of material on the government corporation has been built up in recent years. 
For a discussion of the subject see, among others, Marshall E. Dimock, "Priniciples Underlying Govern- 
ment-Owned Corporations," Public Administration, XHI (January 1935), pp. 51-i66, "Public Corporations, 
and Business Enterprise," Public Administration, XIV (October 1936), pp. 417-28, British Public IJtilities 
and National Development (London^' Allen and Unwin, 1933) and Modern Politics and Administration 
(New York: American Book Co., 1937), ch. XIII; John 5^cDiarmid, Government Corporations and 
Federal Funds (Chicago: University of Chicago Press, 1938); John Thurstone^ Government Proprietary 
Corporations (Cambridge, Mass.: Harvard University Press, 1937); Terence O'Brien, British Experiments 
in Public Ownership and Control (London: Allen and Unwin, 1937); Lincoln Gordon, The Public Corpo- 
ration in Great Britain (London: Oxford University Press. 1938): H. A. Van Dorn, Government-Owned 
Corporations (New York: Knopf, 1926). 



JQ2 CONCENTRATION OF ECONOMIC POWER 

maintenance may be applied to administration as well as to machinery, 
and with equally desu'able results. But the constant attention of 
speciaHzed staff men as well as of regular executives is indicated if 
such a procedure is to be effective. A half-way job may only cause 
additional confusion. 

The use of standard practices and other rules which represent as 
nearly as may- be the "one best way" is to be commended as an ele- 
ment of efhcient administration. Nevertheless, if flexibility is to be 
maintained, emphasis must be upon results rather than upon blind 
obedience to regulations. Excess legalism not only destroys personnel 
interest but introduces an extreme form of bm'eaucratic inflexibility 
which is always inefficient. Rules must be recognized as merely a 
jneans to certain ends. To insure this attitude there must be a 
well-formed and widely understood conception of the aims of the 
enterprise. 

Improved methods of coordination and control also counteract un- 
responsiveness and inflexibility. The development and use of unit 
measurements of performance, in monetary, as well as in nonmonetary 
terms, merits wider application. Informal contacts across hier- 
archical lines and the use of interdepartmental or interdivisional 
committees provide effective means of coordination which short cut 
the cumbersome process of referring matters solely throilgh hier- 
archical channels. Flexibility is here more readily attained because, 
adjustments can be made at the source of the difficulty. In the 
hierarchical structure, coordination is also furthered by restricting 
the number of an official's immediate subordinates. An executive's 
span of control is subject to limitations if he is effectively to co- 
ordinate the activities under his supervision. Indeed, it may be said 
that any methods which increase the effectiveness of coordination 
and x3ontrol likewise contribute to the fight against bureaucracy, for 
without unity of action bureaucratic divisiveness and inflexibility 
inevitably result in wasted time and eft'ort. 

Decentralization of authority and an emphasis upon public relations 
are equally useful devices in keeping administrative methods and 
decisions close to the problems of the enterprise and to the customers. 
They thus contribute to efficiency and to a fuller satisfaction of the 
needs of the market. 

A high level of morale is also essential to the conquest of bureauc- 
racy. The process of its attainment ma;^ be stated quite simply. 
It consists essentially of giving labor what it wants in such a way as 
to improve efficiency and enthusiasm. Briefly, laborers want a 
measure of security, an opportunity to share in improved standards of 
living, nondiscriminatory treatment, and, basic to aU, they want to 
be treated as. human beings — as partners m pro,ductive enterprise — 
and to be given a voice in the determination of policies which vitally 
affect them. Labor is no less, and no more, fair than any other large 
group of men and women. It responds as all such groups do. Astute 
management,- therefore, wiU seize the opportunity to increase pro- 
ductivity at a common cost of httle more than the sacrifice of a few 
illogical and outmoded prejudices. 

Finally, the ill effects of bureaucracy cannot be overcome without 
the developnlent and full use of capable, progressive leaders. Inven- 
tive men who can conceive and plan, who have the abihty, disposition, 
and courage to put bold plans into effect-;-to upset routine and disturb 



CONCENTRATION OF ECONOMIC POWER 103 

established relationships when necessary — ajid who can inspire others 
to unbureaucratic levels of activity, cannot be dispensed with. It is 
not adequate simply to hope that such leadership will arise of its own 
accord. Too many potential leaders are deadened before they get a 
chance, unless special effort is directed toward their discovery and 
development. Many can be recruited from within the concern itself, 
if merit rather than seniority or pull is emphasized in promotions. In 
addition, special recruitment from colleges and small companies is 
necessary in order to obtain new blood and breadth of outlook. But 
whatever the source, potential leaders should be given special training 
and attention in order to develop their -capacities to the full. Then 
they mus+ be advanced sufficiently rapidly to reach their peak posi- 
tions before age overtakes them. Finally, the incentives utilized 
should be such that leadership is developed as well as rewarded. 
Leaders are of such value to the success of an enterprise that no element 
which will contribute to their fullest utilization should be ignored. 

Bureaucracy is an important problem of big-business administration. 
To a large extent, however, it can be overcome by the use of the 
administrative techniques we have discussed. Both business and 
government would profit by their wider application. Such remedial 
action could improve the efficiency of our economic order and thereby 
raise our standard of living. 

The nature of these antidotes, however, precludes their application 
as a direct result of legislative action which the Temporary National 
Economic Committee might recommend. Business in its own self- 
interest should be induced, if possible, to recognize and apply them. 
The committee may, however, draw attention to the problem of 
bureaucracy and indicate the available remedies. Administrators 
need to be reminded of these basic problems and possible solutions. 
They too easily becoeie so engrossed m pressing day-to-day difficulties 
that questions of a continuing and in fact more important nature are 
often neglected. 

In addition, the possibility of enlisting the help of the Department 
of Commerce in increasing the productivity of industry through 
preventing the wastes of bureaucracy should be examined. The 
Department might well be of substantial assistance if it would estab- 
lish a unit to study problems of administration and to give expert 
advice and aid to executives who ask for it. The combined cooper- 
ative efforts of business and government could thus be utilized in a 
concerted assault on one of the most vexing set of problems faced by 
the administrators of big business. If the savings of increased • 
efiiciency were passed on, the whole Nation would benefit materially. 



258325 — 40— No. 11- 



i 



PART IV 

THE IMPLICATIONS OF TRUSTEESHIP 



105 



CHAPTER X 
THE REQUIREMENTS OF TRUSTEESHIP 

We have already shown that trusteeship and bureaucracy are inter- 
related/ for both arise when the modern corporation becomes so 
large that o\vnership is separated from control. Though related, how- 
ever, they may best be individually dealt with, for bureaucracy is a 
problem in management while trusteeship is a problem in democracy. 
Both, of course, are governmental in their nature, involving power 
relationships, leadership, consent, and organizational structure — as 
Gardiner Means has said, the peculiar province of the political scien- 
tist ^ — but they present themselves from different vantage-points. 
Bureaucracy is largely, but not wholly, an internal manifestation, 
involving internal relationships ; while trusteeship deals with external 
relationships, being the responsibilities of managenient toward outside 
groups. 

What are the practical administrative possibilities of trusteeship 
and the methods whereby it can be made effective without the loss 
of counter-balancing administrative efficiency? This is our question, 
and, not only for the government of business but for the government 
of society as a whole, it can scarcely be exceeded in importance. 
In some ways, trusteeship is even more crucial than bureaucracy, its 
causes and attempted cures, for it is one of the pivotal problems of 
our democratic-capitalist structure. 

We shall not attempt to deal with the legal and economic aspects 
of trusteeship, for we feel that they may be better covered by others 
who have already written on the subject or who are preparing special 
reports for the Temporary National Economic Committee. As in 
the case of bureaucracy, therefore, our attention will be directed to 
the administrative requirements ajid implications of our subject, 
which of necessity is partly m the realm of exhortation as well as 
partly, and perhaps fortunately, in that of practical prescription. 

The point of departure is to remind ourselves that corporate 
managers have automatically, although not necessarily inescapably, 
assumed a fiduciary responsibility toward owners, their nominal 
masters. The present dift"usion of stock and weakness of effective 
stockholder control create a situation closely resembling that of the 
ordinary trustee and beneficiary. In both cases, direction is in the 
hands of persons other than the owners, for whose benefit, however, 
the property or business is presumably administered. 

In the ordinary trust relationship the law has established certain 
broad requirements. In regard to trust companies, for example — 

the law seeks to emphasize the sacred and binding character of a trust; hence it 
does not permit the trustee to administer the trust for his own benefit, while it 

' Supra, pp. 3-!^. 

» Gardiner C. Means, "The Distribution of Control and Responsibility in a Modern Economy," in a 
symposium edited by Benjamin E. Lippincott, Government Control of the Economic Order (Minneapolis: 
University of Minnesota Press, 1935), pp. 1-17, 8. 

107 



1Q8 CONCENTRATION OF ECONOMIC POWER 

requires him to- use reasonable care to act in accordance with the terms of the 
trust instrument, under liability of an action at law by the beneficiary.' 

The analogy is there, but the impKcations are not parallel, for in 
the case of corporate trustees the limitations on action have not been 
correspondingly extensive. If, for example, by reason of its position, 
management can without deception but equally without disclosure, 
take advantage of a shareholder without depleting the corporate 
assets', he may do so.* Despite the legislation of recent years, there 
remains considerable opportunity to distribute potentially profitable 
transactions, such as purchases and sales, on bases which include 
favoritism. Managers can alscr use their positions of power to obtain 
high salary and bonus rates. These are but two of the many ways 
in which management may turn power into private profit. "The 
trouble with our company is that it needs to take the dollar sign out 
of its sj'^mbol," said one business official; "the executives work only 
for money and hence not for the corporation." 

With the separation of ownership and control, either businessmen 
must be instilled with a volimtary and effective sense of trusteeship, 
or society must discover means wherewith to make trusteeship effec- 
tive. A realist will not rely upon either means alone. It is the part 
of statesmanship to make them coalesce. 

Belief in the efficacy of voluntary trusteeship may appear sanguine, 
but there is' at present no alternative when corporations become so 
large that the market loses much of its effectiveness as a regulator. 
The primary argument in support of private capitalism when it was 
throwing off the shackles of mercantilism was that competition, like 
an invisible hand, would guide economic activity into the most pro- 
ductive channels. Competition was to be society's protection against 
profiteering and other unscrupulous practices, and was also to pro- 
vide an opportunity for the exploitation of inventions both in m,ethods 
and materials. The market was to serve as arbiter of the claims of 
rival m.erchants and customers. Such a plan might work in a simple 
econom.ic society composed of many sm.all, independent enterprises, 
but with the growth ^f big business the market loses much of its 
potency as a regulator. Indeed, today many of its functions have 
been taken over by administrators of the giant corporations.* 

Now we have a situation wherein society has granted certain" eco- 
nom.ic liberties while relying upon the market for protection against 
their abuse. With this protection substantially curtailed, it is nec- 
essary that other instrum.ents of regulation be discovered and applied. 

Recently there has been increasing evidence of a vague awareness 
of broad responsibility on the part of corporate management. An 
examination of the annual reports of some of the large companies for 
the past few year§ reveals that frequently a section deals with corpo- 
rate responsibility l^o various groups. Those most often mentioned 
are the investors, labor, and consumers or the public. Som.etimes 
governm.ent is aho included. The responsibilities commonly alluded 

« W. H. Steiner, "Tru^t Companies," Encylcopaedla of the Social Sciences, XV, p. 110. 

< See Berle and Jlean^ op. cit., pp. 221, 226. This freedom to "milk" investors by the purchase and sale 
of stock on the basis of inside information was substantially curtailed by section 16 (b) of the Securities 
ani Exchange Act of 1934'. Under this provision, profits from sale and repurchase or from purchase and 
resale of the securities of a company with which the officer, director, or beneficial owner is identified, are 
recoverable, with certain exceptions, if the cycle of transactions is completed within a period of 6 months. 
Of course, this limitation applies only to securities listed on exchanges, but it is probably here that manipu- 
lation and stock transactions on the basis of inside information have been ipost profitable. 

» For a fuller discussion of these points see supra. Part I. 



CONCENTRATION OF ECONOMIC POWER 109 

to are the provision of a fair, adequate return on investments; fair 
wages and working conditions, together vrith some mention of regu- 
larity of employment; and a good product at a fair price. What is 
"fair," however, is seldom defined. It must, of course, be recognized 
that the mere mention of responsibilities does not necessarily assure 
their acceptance. ' Effective public relations teclmiques do not require 
the literal fulfillment of such statements. Nevertheless, once the 
responsibilities are admitted there is more hope of their gradual trans- 
lation into conduct. 

A logical analysis of the requirements and implications of trustee- 
ship may be expected to influence the attitudes of executives. Owen 
D. Young has said, for example, "It makes a great difference* in my 
attitude toward my job as an executive ofTicer * * * whether I 
am a trustee of an institution or an attorney for the investor." ' 
Enlarging upon this statemei>t, he made the customary break-down 
of his trusteeship into that toward the investor, toward labor, and 
the public. He wanted his company to be so m.anaged that capital 
would be readily available at all times, the best laborers would want 
to work for it, and the public would prefer its products. The satis- 
faction of each of these groups, of course, reacts favorably on the' 
others, for as another executive has pointed out, "Responsibihty to 
the investors is not at variance with responsibility to other groups; 
if you serve these other responsibilities you serve the owners better 
than if by not meeting those obligations you create an untenable 
situation." And an official of a third corporation maintains, "Our 
com.pany needs a public utility philosophy; if it doesn't get one it 
will become a public utility." 

In a practical sense, management is a broker who balances, har- 
monizes, and controls the demands of various interested groups and 
fuses the net result into a workable program of action. The weight 
which is given to the demands of a particular group depends upon its 
effective strength, plus the degree to which management feels a respon- 
sibility to it. Thus, effective trusteeship is the result of a combina- 
tion of traditional obligations and adequate pressures. We must 
briefly examine the mof e important of these to which management is 
subject. 

First, a general observation: Managers must be inventive if there 
is to be progress. While it is true that particular groups often oppose 
the introduction of new methods, products, or ideas, yet the broad 
interests of the larger groups are on the side of invention. It is in 
the interest of management itself to develop new methods whereby 
its tasks may be easier or its work more effective; stockholders desire 
the additional dividends which may be forthcoming from the devel- 
opm.ent of new products or the exploitation of new markets; labor 
favors increased opportunities for employment and expanded produc- 
tion if it can share in the benefits; consumers want more and better 
products and services within reach of their purchasing power; gov- 
ernment, as^ the agent of the people, wants prosperity and progress 
with fair play. An inventive, aggrejrive management is in a position 
to contribute substantially to the s; t sfaction of those desires. 

More and more we are dependei t upon large research laboratories 
for the development of new prod i' ts and methods. Although the 

« Fortune, III (March 1931), p. 94. 



no CONCENTRATION OF ECOiyOMIC POWER 

period of simple discoveries is by no means past, the most important 
scientific developments are becoming increasinglj^ the products of the 
large laboratories, supplied with ample capital and specialists. In 
some respects research itself has almost become big business. Several 
of the largest companies have research laboratories which are com- 
parable to the best which universities and government can offer. 
But much remains to be done. The chairman of General Foods 
Corporation, for' example, has said: "I, for one, am surprised to 
realize that only one or two American manufacturers out of every 
hundred have a research lai^o' tory. * * * We can and must do 
more." '^ The outer bount ar.es of applied science have not been 
reached, and it is part of the trusteeship function of business to help 
extend the frontiers. 

But social invention is even more urgently needed than scientific 
discovery. Social lag is pronounced in our economic world, and 
potential production is far in advance of actual consumption.* We 
need aggressive inventors to open up new markets, to create distri- 
bution machinery as efficient as present production machinery. 
There is also much room for invention in the realms of labor relations 
and managerial methods. Some of the largest corporations have 
specialized staft's spending full time on the development of new 
personnel procedures, but it is only a beginning. We need more 
inventive minds and more encouragement and opportunity for those 
we have. 

In an examination of the group pressures which impinge upon 
management, a logical starting point is the demands of the managers 
themselves. Without exhausting the list, it may be said that they 
desire income, influence, security, and some opportunity for creative 
expression. The position of influence wliich management occupies in 
tbe large corporation indicates that this aspiration at least has 
received a substantial degree of satisfaction. The opportunity for 
creative expression, on the other hand, has been hampered, but there 
is clearly more opportunity in this regard for managers than for the 
rank and file. 

The managers' desire for security has also been largely satisfied, 
at least at the top levels. Insofar as security relates to employment, 
w,e have already noticed that the top men of some of the largest 
corporations have been employed by their companies for a considerable 
number of years. Turn-over for the top positions is not particularly 
large.^ Nor were positions at the upper levels materially decreased 
or abolished with the onslaught of the depression. An indication of 
the stability of executive employment for a sample of 100 large 
industrial companies is presented in table XIX. For comparative 
purposes an index of industrial employment for wage earners is 
included. The relative stability of executive employment is doubtless 
due to the necessity of retaining key men as well as to the power which 
executives themselves possess. At the top levels of management, 
therefore, security of employment has been to a large extent attained, 
while in the ranks, wage earners may be dropped. 

' From a speech by C. M. Chester, reprinted in the Congressional Record, Tuesday, February 6, 1940, 
p. 176). 

' A number of studies of this subject have been made. For a conservative estimate see Ed win Q . Nourse, 
America's Capacity to Produce, and Maurice Leven and others, America's Capacity to Consume (Wash- 
ington: Brookings Institution, 1934). 

» See table X, p. 46; also p. 52. 



CONCENTRATION OF ECONOMIC POWER 



111 



Table XIX. — Fluctuation in executive employment in 100 large industrial com- 
panies and in employment of wage earners in factories, 1928-32 ' 



Year 


Number of 
executives 


Relatives 
(1929 = 100) 


Industrial 
index of 
employ- 
ment, 
wage 
earners 


1928 ^ - 


941 
996 
995 
1,008 
986 


94 
100 
100 
101 

99 


94 


1929 -.- - - 


100 


1930 . - - 


88 


1931 i - 


73 


1932 - 


61 







1 From Joha 0. Baker, Executive Salaries and Bonus Plans (New York: McQraw-Hill, 1938), p. 14. 

There is also comparative stability in salaries and in total executive 
compensation during good times and bad. John C. Baker remarks, 
for example, that in 100 large industrial companies, "successive 
reductions in 1931 and 1932 left the total (executive) salary payments 
only slightly below the 1928 level, about 2.5 percent. * * * "VVe 
are forced to conclude that salaries of executives are highly inflexible, 
to the point of being almost a fixed charge upon the company."'^ 

As might be expected in the depression, bonus payments to execu- 
tives dropped along with business activity and profits, and under 
those circumstances some corporation officials had their total remuner- 
ation substantially reduced. Nevertheless, it should be noted that 
the basic salaries of executives who also receive bonuses are about 
equal to those of executives who are paid solely by the salary method. 
As John C. Baker has pointed out — 

There is no evidence that the use of bonus plans lowered the regular cash salaries 
paid executives. Instead, there is definite evidence that companies paying 
bonuses paid larger total compensation to their officers than .did non-bonus- 
paying companies." 

Thus, a reduction in bonuses did not create an inequality of remuner- 
ation. 

Total compensation, including salaries and other rewards, remained 
relatively stable in the buoiness decline of the early 1930's at least 
in comparison with such items as earnings and wage payments. 
Chart VIII, for example, shows the relationship between executive 
compensations, earnings, and dividends for 51 large industrial com- 
panies during the period 1928-36. The comparative stability of ex- 
ecutive compensation is apparent. For a large group of corporations 
the Twentieth Century Fund staff found that in 1933 total executive 
compensation had dropped to a point 38 percent below the 1928 level, 
but that during the same period wage and salary payments to other 
employees had dropped 49.2 percent.'^ 

In summary it may be said that salaries — 

do not vary nearly as much with general business conditions as do wages or 
dividends. On the whole, in good times and bad, corporate officers, as a group, 
fare better than wage workers or investors. In bad times, total salary payments 
to officers are "stickier" than wages and dividends — they go down more slowly 
and less far; in good times they go up faster and farther. '^ 

10 John C. Baker, op. cit., p. 20. 

"Ibid., p. 235. 

" Twentieth Century Fund, A Memorandum on the Problem of Big Business, p. 26. 

" Ibid., p. 25. 



112 



CONCENTRATION OF ECONOMIC POWER 



Total compensation is more variable, but here also the decline during 
the depression was only about one-half or two-thirds as great as the 
decline in wage payments and much less than the decline in dividends 
and earnings. 

Chart VIII. — Fluctuation in Executive Compensation, Bal- 
ance Available for Dividends, Earnings,^ and , Total 
Dividends for 51 Large Industrial Companies: 1928-1936 ^ 




1928 1929 1930 
^ Data not available 

' Earnings is defined as net income after all charges including depreciation and Federal 
taxes, but before executive compensation and interest. 

> From John C. Baker, Executive Salaries and Bonus Plans (New York: McGraw-Hill, 1038), p. 180. 

The level of compensation indicates not only that a fair degree of 
security has been achieved, but that the desire of management for 
oersonal income has also received substantial satisfaction. An indi- 
cation of executive compensation for 44 large industrial companies is 
given in table XX. The dollar figures in this table refer to the 
medians; that is, half of the executives in each category received more 
than the amount stated and half received less. While the variations 



(X)NCENTRATION OF ECONOMIC POWER 



113 



were rather substantial, the figures nevertheless give a rough, gen- 
eralized picture for the group. Moreover, "large companies generally- 
paid higher total doUar compensation, irrespective of earnings, than 
small companies." ^* 



Table XX. 



•Typical dollar executive compensation of 44 large industrial companies, 
1929 and 19S6 » 



Banking of executives in Individual companies 



1929 

highest paid executive 

Second highest paid executive 

Third highest paid executive., 

All other executives (averaged) 

Total executives (averaged)— 

1936 

Highest paid executive 

Second highest paid executive 

Third highest paid executive 

All other executive,"! (averaged). 

Total executives (averaged) 





Percent 




of me- 




dian - 




com- 


Amount 


pensa- 


(median) 


tion of . 




highest 




paid 




execu- 




tive 


$101,000 


100 


76,000 


75 


. 59,000 


68 


26,000 


26 


40,000 


40 


93,000 


100 


64,000 


69 


50,000 


54 


» 24, 000 


26 


» 35, 000 


38 



1 From John C. Baker, Executive Salaries and Bonus Plans (New York: McGraw-Hill, 1938), p. 181. 

' These averages for 1936 are to be considered merely suggestive, since the total dollar amounts paid to 
executives in 1936 were in a few cases estimated for use in the study, and in many instances the total number 
of executives employed was not clearly stated on the Securities and Exchange Commission Form lOK for 
1936. 

Thus, it is obvious that average executive salaries achieve comfort- 
able proportions. 

We may then conclude that the demands of managers for influence, 
freedom, security, and income have met with substantial response. 
Because of their value to the corporations and their positions of power, 
the executives of the large concerns have signally registered on every 
score. There is little that can be recommended, other than the sug- 
gestion that it would perhaps be well to equalize some of the widest 
variations in executive compensation. As a group, management fares 
better than any other large aggregation interested in the American 
economy, and this is particularly true of the giant corporation. 

Several related questions are immediately suggested. Have other 
groups fared as well at the hands of management, as management 
has itself? Are the pressures which these groups are able to exert 
sufficient to make trusteeship effective? If management were left to 
govern itself would the legitimate demands of these other interests be 
met? To a brief examination of such questions we may now turn, 
taking first the stockholder group. 

Despite the predominant power of management, major stockholders 
and the managers of the large corporations ordinarily get along very 
well together. It is probably safe to assume that these major stock- 
holders obtain substantially what they want if the corporation and 
the management have the wherewithal. Some executives feel that if 
there is a strong concentration of stock ownership, the desire for a 
"killing" is intensified. The corporation is then managed for the 

. i« John C. Baker, op. cit., p. 239. 



114 CONCENTRATION OF ECONOMIC POWER 

short-run benefit of the few large owners rather than for the long-run 
benefit of the business and the other groups concerned. Regardless 
of the extent to which this may be true, the large stockholders are at 
least better able to obtain what they want than are other nonmanage- 
ment interests. 

The small, and in fact the typical, stockholder in the large corpo- 
ration presents a different problem. Although he shares in owner- 
ship, power has been shorn from him. Such stockholders do not 
invest their money with the mtention of gaining control over com- 
pany policies. Theirs is what we have termed "cataclysmic control," 
exercised under leadership and only in periods of grave crisis. Rather^ 
they desire a liberal, steady rate of earning. They do, however, 
possess a lever with which to move management. An expanding 
corporation must have additional funds from time to time which 
cannot always be provided from surplus. Hence management must 
so treat the rank and file of stockholders that financial aid will be 
forthcoming when it is required. 

The large companies as a group have a more stable rate of earnings 
than small companies, since among the large concerns the spread 
between profits and losses is smaller. Whether or not the giant cor- 
porations as a group also earn at a higher rate than the various groups 
of smaller concerns, appears, on the basis of available data, to be an 
open question. The Twentieth Century Fund staff has found, how- 
ever, that if appreciation in the value of stock is considered, a widely 
spread investment in the largest companies would have resulted in a 
satisfactory rate of earnings. For the period 1931-33, for example, 
they found that corporations with assets of $50,000,000 or more con- 
stituted the only group which showed a net profit for each of these 
3 years. To a considerable extent, however, this may be due to 
differences in the capital structure of the large and small concerns. 
Giant corporations usually have a higher proportion of common stock 
and thus a lower proportionate fixed charge against earnings. In 
addition, the large companies paid more regular dividends through 
the depression because of accumulated surpluses on which they could 
draw.^^ 

In general, then, it may be said that the giant corporation sub- 
stantially satisfies the stockholders' desire for secm-ity. Likewise, 
earnings over a period of time compare favorably with those of other 
enterprises, particularly when increases in the value of stock resulting 
from accumulated surpluses are taken into account. 

Some large companies could occasionally pay higher dividends 
through a decrease in other expenditures. It is not necessary, for 
example, to pay large bonuses in addition to liberal salaries in order 
to spur executives to their full effort and ingenuity. As we have 
pointed out, bonus payments among the large companies have not 
generally been used instead of salaries, but in addition to them. 
Thus, John C Baker comments: "On the average, the chief execu- 
tive who received a bonus also was paid a salary within a f ev/ thousand 
dollars as large as & president who was simply paid a fixed cash 
salary." *^ While Baker found in his study that executive compen- 

" For data in support of this paragraph see the Corporation Survey Committee, How Profitable Is Bip: 
Business? (New Yorli: Twentieth Century Fund, 1937) and A Memorandum on the Problem of Big 
Business. ^ 

>« John C. Baker, op. cit., p. 222. 



CONCENTRATION OF ECONOMIC POWER Ug 

sation in the large corporations taken as a whole represented a mod- 
erate percentage of earnings and sales, nevertheless — 

the variations in such payments, * * * were so wide as to raise some question 
concerning the policies being followed among certain companies. Whether execu- 
tive payments were too high or results too meager are questions, which might be 
asked of specific companies. Statastically no significant relationship or correla- 
tion could be discovered between executive compensation and earnings." 

Savings in executive bonuses could be properly diverted to stock- 
holders or reflected in benefits to other groups. In the giant corpo- 
ration, however, these increases would be quite small, because execu- 
tive compensation does not constitute so large an item as dividend 
payments. During the period 1928-36, for example, shareholders of 
a sample of the large corporations received on the average some 14 
times the sums received by executives.'^ Obviously any reduction in 
bonus payments would represent but a small part of the total com- 
pensation of executives and a much smaller part of dividend pay- 
ments. Nevertheless, in specific companies the benefit to stock- 
holders might be substantial. 

Savings to investors could be promoted in other ways as well. It 
is, of course, impossible to estimate the extent to which the so-called 
borrowing of funds by executives such as Richard Wliitney, or the 
l^te F. D. Coster (or Philip Musica), formerly of the McKesson & 
Robbins drug firm,'* has been and is carried on. The fate of these 
men may give others pause. In any case, trusteesliip demands that 
such practices be eliminated. 

Without exhausting the list, we may mention, finally, losses to 
investors arising from poor business judgment. It is naturally too 
much to expect that business leaders shall direct the affairs of large 
corporations without erring, but many of the more serious mistakes 
of judgment could be prevented by adequately gathering and using 
available information. An expansion of corporate research facilities 
is, therefore, indicated, as well as an operumind on the part of those 
who make the major decisions. 

Among instances of mistaken judgment there is a group that is 
particularly important in a discussion of trusteeship. These are the 
cases where business judgment is at least partially blinded by the 
prospects of possible advantages accruing to management or those in 
control. The InsuU utiUty empire is an example. Here legal as well 
as actual power was concentrated in the hands of Samuel Insull and 
his associates, despite a proportionately small investment on their 
part. Under an expanding economy the rewards were large, but the 
process of financing by issuing senior securities to the public and re- 
taining the voting paper created so inflexible a pyramid that it could 
not adjust to a decline in economic activity. Here it was poor judg- 
ment plus an imperfect sense of trusteeship on the part of those in 
control that caused, such disaster to the investors' interests. 

Excessive salary and bonus payments, occa^onal dishonesty, poor 
business judgment, and the use of the corporation for private ends 
are ways in which potential benefits to stockholders are lost. Stock- 
holders cannot often remedy such faults, because their power is so 

" Ibid., pp. J83-184. 

18 Ibid., p. 157. 

" See New York Times, M^rch 9, 1938, et seq., especially the issues of October 28, November 1 and 2, 
which give- a summary of the Securities and Exchange Commission report on the Whitney case. For the 
Musica case, see "McKesson & Robbins: Its Fall and Rise," Fortune, XXI (March 1940), p. 72, ■ 



116 CONCENTRATION OF ECONOMIC POWER 

diffused. They might, of course, create effective pressures by de- 
manding more information and responsibihty than they now have, 
and they might also make additional use of the instrument of govern- 
ment. By and large, however, the stockholders of the giant corpora- 
tions have little of which they can complain. The requirements of 
security and liberal .returns on invested capital are largely met by 
the managers -of these concerns. 

Management trusteeship is also directed toward labor. With the 
growth of the factory system and the loss of face-to-face contacts, 
management's responsibility regarding the desires of labor suffered a 
drastic decline. Men, women, and children were worked long hours, 
and even valuable employees were, and still are, laid off instead of 
'tided over. 

The human desires of labor have been discussed in a previous 
chapter,^" together with some methods of satisfying them. " We have 
also seen that the labor record of the large companies on the whole 
compares favorably with that of the small ones. 

In remedying the discrepancies which exist, labor now has several 
important instruments. The logic of enlightened self-interest on the 
part of management is one of these. When managers fully understand 
the potentialities of high morale and a curbed bureaucracy, remedies 
such as we have discussed will be more widely applied. In* addition, 
recent laws help to correct some of the more flagrant violations of 
the needs and rights of labor. The Social Security Act, for example, 
helps to satisfy the desire for security; the Wages and Hours Act 
' puts "a floor under wages and a ceiling over hours" for milUons of 
workers; the National Labor Relations Act guards labor's right to 
organizQ and bargain collectively. These and other statutes of long 
standing, such as the workmen's compensation acts and other regu- 
latory measures in the various States, provide a legal basis for equi- 
table relationships between management and labor. 

Furthermore, the bargaining power of labor has been enhanced 
through the recent growth of labor unions. The claimed membership 
is now approximately 8,000,000, and constitutes about a fourth of the 
employee group. The proportion is higher in the industrial sectors 
where the large corporations grow thicke&i,. Labor is thus in a rela- 
tively mor(? favorable position than in the past to exact a degree of 
effective trusteeship on the part of management. 

There are indications', also, that management is increasingly aware 
of its responsibilities to labor. The acceptance of collective bargain- 
ing by such corporate giants as United States Steel and General 
Motors is illustrative. So also is this statement of a corporation 
president to the workers in the enterprise: 

It is the chief concern of the managers to try to plan for the best possible 
uninterrupted annual wage for both job holders and stockholders. Then neither 
of them will have to be laid off. Your company managers know that both 
stockholders and job holders are dependent upon each other, and that neither 
could profit without the support and cooperation of the other.^' 

Despite such advances in the building of trusteeship, there are large 
gaps which remain. A full recognition of bargaining equaUty for 
labor is far from realized. All too often, Ikbor is looked upon as a 
commodity. Workers are not credited with the same desires, needs, 

s" Supra, ch. VIII. ^ , ^ 

" From the foreword by Lewis H. Brown In The Year 1937: A Report to all Members of the Johns- 
Manvllle Organization (New York: Johns-Manville, 1938), p. 1. 



CONCENTRATION OF ECONOMIC POWER 



117 



and feelings as managers. On the economic side, we liave already 
noted that the salaries and employment of managers are much more 
stable and favorable than the corresponding items in respect to labor. 
In addition, the mcome level of midtitudes of the Nation's workers 
is miserably low. Tliis is revealed in chart IX and table XXI, where 
the concentration of families and single individuals ^^ at a relatively 
low income level is set forth. Twelve million of these, or nearly a 
third, have annual incomes of less than $750; 27 million, or about 
two-thirds, receive less than $1,500, or an aggregate income approxi- 
mately equivalent to that of the most fortunate 10 percent. The top 
one-half of 1 percent obtains about the same total income as the 
bottom 32 percent. Moreover, economic circumstances or other con- 
siderations caused the 6 poorest tenths to spend more than their 
current mcome, more in total than the next thi*ee-tenths saved. 

Table XXI. — Distribution of families, and single individuals and of aggregate 
income received, by income level, 19S5-S6 ' 



Income level 



Families and single individuals 



Niunber 



Percent 

at each 

level 



Cumula- 
tive 
percent 



Aggregate Income 



Percent 

at each 

level 



Cumula- 
tive 
percent 



Under $2,'iO_... 

$2r)() to $500 

$500 to $750 

$750 to $1,000 

$1,000 to $1.250. 

$1,250 to $1,500 

$l,5fl() lo $1,750... 

$1,750 l,o$2.(K)0 . 

$2,000 to 32,250 

$2,-.>riO lo $2,500 :... 

$2,500 1.0*3,000... 

$:i,(K)0 l.o$3,.500 . . 

$:i,5oo io$'i,ooo 

$4,000 to $4, 500 

$4,500 lo $5.000...' :.. 

$5,(i00lo$7,.5n0 

.$7,.M)() lo JIO.OOO ..". 

$10,000 to $15.000 

$I.V)00 lo$20.0f)0 

.?20,000 to $25,000 

$25.000 10 $30.000.... 

$30,000 I o,$40.000 

$40,000 I o$.'i0.000 

$.50,000 to $100,000 

$100,000 1,0 $250,000 

$2,';0.0(H) 1,0 $.500.000 

$.")00,n(.n to $1,000.000 

$1,000,000 anil over. 



123,534 

587, 377 

771, 960 

876,078 

990,995 

743,428 

889, 904 

296, 022 

704, 535 

254, 076 

475, 474 

851,919 

50^, 159 

286,053 

178, 138 

380, 266 

215,642 

152, 682 

67, 923 

39. 825 

25, S83 

17, 959 

• 8. 340 

13, 041 

4,144 

916 

240 

87 



All levels 39,458,300 



5.38 
11.63 
14.63 
14.90 
12.65 
9^49 
7.32 

5.ro 

4.32 

3.18 

3.74 

2.16 

1.27 

■ .72 

.45 

.96 

.55 

.39 

.17 

.10 

.06 

.05 

.02 

.03 

.01 

(») 

(») 

(») 



5.38 
17.01 
31.64 
46.54 
59.19 
68.68 
76.00 
81.82 
86.14 
89.32 
93.06 
95.22 
96.49 
97.21 
97.66 

-.98. 62 
99.17 
99.56 
99.73 
99.83 
99.89 
99.94 
99.96 
99,99 

100. 00 



$294, 

1, 767, 
3, 6,15, 
5,129, 
5, 589, 
5, 109, 
4,660, 
4, 214, 
3, 602, 
2, 968, 
4,004, 

2, 735, 
1, 863, 
1,202, 

841, 

2,244, 

1,847, 

1, 746, 

1, 174, 

889, 

720, 

641, 

390, 

908, 

639, 

264, 

134, 

157, 



138, 000 
363,000 
653,000 
506, 000 
111,000 
112,000 
793, 000 
203,000 
861, 000 
932, 000 
774,000 
487, 000 
384,000 
826,000 
766,000 
406,000 
820, 000 
925, 000 
574, 000 
114,000 
268,000 
272, 000- 
311,000 
485, 000 
006, 000 
498, 000 
803, 000 
237,000 



0.50 
2.98 
6.10 
8.65 
9.42 
8.62 
7.87 
7.11- 
6.08 
5.01 
6.76 
4.62 
3.14 
2.03 
1.42 
3.79 
3.12 
2.95 
1.98 
1.50 
1.22 
1.08 
.66 
1.53 
.91 
.45 
.23 
.27 



0.50 
3.48 
9.58 
18.23 
27.65 
36.27 
44.14 
51.26 
57.33 
62.34 
69.10 
73.72 
76.86 
78.89 
80.31 
84.10 
87. 22 
90.17 
92.15 
93.65 
94.87 
95.95 
96.61 
98.14 
-9.05 
99.50 
99.73 
100.00 



100.00 



69,258,628,000 



100.00 



1 From National Resources Coinjnittee, Consitmer Incomes in the United States (Washington: Qovem- 
ment Printing Office, 1938). p. 6. 
« Less than 0.005 percent. 



While such picturizations and comparisons do not of themselves 
make a complete case for an improvement in the income levels of thfe 
poorer laboring groups, they do indicate the Existence of a problem 
which begs for solution. An approach through new, direct legislation 
would probably not be so useful or productive as a consolidation of 
gains already made and an emphasis upon a more widespread attitude 
of trusteeship on the part of management. 

" A single individual is admittedly different from a family, but a family of 8 or 10 is likewise different 
from one of 2 or 3. Consequently, when considering income levels it is almost as valid to combine families 
and single individuals, as we have done here, as to treat them as 2 distinct groups. In such a combination, 
however, families predominate roughly in the ratio of 3 to 1. 



118 CONCENTRATION OF ECONOMIC POWER 

In many respects consumers find themselves in an even weaker 
position than labor. In reahty, of course, a worker is as much a 
consumer as he is a producer, but the consumer group includes more 
than labor. It may be useful, therefore, to look separately at the 
responsibilities and effectiveness of trusteeship as they relate to the 
consumer-manager relationship. 

We have already noted the degree to which managers, rather than 
consumers acting through the market, have assumed control over 
prices and obviated competition in a large sector of our econpmy.^^ 
The traditional power of the consumer to shop elsewhere if he con- 
siders .prices too high is now greatly limited or without effect. Under 
monopoly, it will do him no good to go elsewhere. His remaining 
•choice is to buy or to do without. His power of selection may oc- 
casionally be effective if, as one of a group, he drastically limits his 
purchases when prices are out of line, but results are not nearly so 
certain as when consumers could abandon an offending merchandiser 
and buy only from a competitor. So-called consumers' strikes have 
soinetimes been successful for short periods in limited areas, but the 
history of such efforts does not indicate that they are a potent source 
of consumer power. Consumers are too diffused and too prone to 
emphasize their producer rather than their consumer functions. 
Moreover, many commodities are now considered necessities which 
must be bought even at high prices. The possibility, therefore, of 
controlling managers through selective purchasing or through non- 
purchasing holds little promise. 

It should be almost axiomatic that the end of production is con- 
sumption', but such a simple proposition has not as yet gained suffi- 
ciently widespread acceptance. The same fate has so far met the 
idea that in a democracy social and economic gains should be mass 
gains. Rather, it is contended that since improved methods and 
ideas are the creations of management, the managers and compapies 
should receive the benefits. Without discussiQg this in detail we 
should at least point out that it is true only to a strictly limited ex- 
tent, providing we repudiate the idea of a class society. Second 
thought clearly reveals that, in general, managers are responsible for 
only a minor part of each improvement. The new ideas which men 
have, trace their roots to the ideas of contemporaries and to the con- 
tributions of the past. Frequently the fundamental research has 
been done in university or governmental laboratories or by independ- 
ent inventors of materials or thought. The product, therefore, 
belongs not to individuals or even to corporations, but to society as 
a whole. 

If consumption is the end purpose of production, then busiuess 
policies should be pointed toward the largest possible consumption 
over a considerable period of time. Prices should be sufficiently high 
to cover all costs, including that of capital, but should not be sub- 
stantially above this because of consequent restrictive effects upon 
consumption. Wages likewise should be adequate to create and 
maintain a mass market for mass-produced goods. Both investors 
and executives should be paid enough to elicit their best performance, 
and there is little reason for paying more. 

In practice, of course, this ideal of purpose and sharing is imper- 
fectly attained. It is true that each year the consumer is able to 

" Supra, eh. II. 



Chakt IX -Distribution of Income in the United States > 



PROPORTION OF NATION'S CONSUMER UNITS RECEIVING EACH TENTH 
OF AGGREGATE INCOME ' . 



AeCREOAT 


'TgmEST 


MtlfH» 


NINTH 


mmn 




SEVEKIX 


mma 


FOU»™ 


mma. 


mmm 


E: 




SHARE OF AGGREGATE INCOME RECEIVED BY EACH TENTH OF NATION S 
CONSUMER trljUTS ' 



mnm 



mnm 



mam 



mnm 



mnm 



mnm 



nnmn 



nnmn 



mnnn 



nmm 




.GGREGATE OUTLAY OF EACH TENTH OF NATION S CONSUMER UNITS 
FOR CONSUMPTION, SAVINGS, AND GIFTS AND PERSONAL TAXES * 





1 From National Resources Committee. The Consumer Spends Sis Income (Wasbington: Qovemmeot 



* Taxes ebov. a here Include only personal mcome taxes, poll taxes, and certain personal property taxes. 
Many taxes borne by consumers have been merged with the expenditures for goods and services to whloh 
they ap^ly. I>usiness taxes and tuces paid on Income-producing property were deducted as business expense 



In calculating the net income of consoniers. 



258325— 40— No. 11 (Face p. 116) 



CONCENTRATION OF ECONOMIC POWER Hg 

buy new products or improved old ones. But what he gets and what 
he could get are vastly different things. As an executive of one of 
the largest corporations has stated, "It has always been an internal 
policy in our company to earn 30 percent on the investment. This 
will be maintained at all costs. How much we give to labor and to 
the consumers is a matter of intelligent self-interest." While there 
is no doubt that the customers of this corporation have progressively 
obtained increasing value for their money, it is at least an open 
question whether they could not have received considerably moie if 
competition were more effective. It is not necessary to pay a 30 
percent return in order to attract ' capital to large companies in an 
established industry. 

The administration of the antitrust acts has revealed a number of 
methods, many of which are now current, whereby trade has been 
restrained through monopolistic practices to the detriment of the 
consumer. The emphasis here has been the effect of monopoly on 
competitors rather than on consimiers, but consumers are directly — 
and usually adversely — affected. Accounts of some of the most 
famous cases have been given in a number of places.^'* A condensed 
compilation and discussion of more recent instances has been pre- 
sented to the Temporary National Economic Committee by the 
Federal Trade Commission. ^^ A perusal of these studies indicates 
that combination is as natural as competition, and that when com- 
petition disappears the consumer is the chief sufferer. It has beefa 
observed that — 

it may not accord with reason; but the ordinary executive is prone to look upon 
a high unit price as the key to profits and is little disposed to experiment with 
lower prices as a device for securing larger sales. ^' 

The preoccupation of businessmen with price raising and price 
fixing was highlighted by the N. R. A. The power of business here 
was strong: The governing bodies or code authorities were composed 
almost exclusively of the businessmen concerned in the particular 
industries; labor and consumers had scarcely a voice. ^^ The codes 
themselves were drawn up by businessmen and submitted for ap- 
proval by the N. R. A. For the most part, the wage and employ- 
ment sections were provisions which the various businesses "were 
willing to grant 'voluntarily' only in exchange for an increased con- 
trol over prices^ production, and other matters which they regarded 
as desirable." ^* Indicative of the attitude of mind is the fact that 
the three moat common types of trade-practice requirements written 
-into the codes were: (1) Practices tending to effect minimum price 
(79 percent of the codes); (2) uniform methods of cost finding (72 
percent); (3) open prices (59 percent), usually with a waiting pe- 

'* See, for example, D. M. Keezer and S. May, The Public Control of Business (New York: Harper, 1930); 
T. C. Blaisdell, The Federal Trade Commission (New York: Columbia University Press, 1932); N. B. 
Gaskill, The Regulation of Competition (New York: Harper, 1936); and Thurman Arnold, op. cit. 

'' Published as Part 5-A of the Temporary National Economic Committee's series. Investigation of 
Concentration of Economic Power, entitled Federal Trade Commission Report on Monopolistic Practices 
in Industries (Washington: Government Printing Office, 1939). 

" Walton Hamilton and Associates, Price and Price Policies (New York: McOraw-Hill, 1938), p. 548. 

" L. S. Lyon and others. The National Recovery Administration (^Vashington: Brookings Institution, 
1935), p. 528; Robert H. Connery, The Administration of an N. R. A. Code: A Case Study of the Men's 
Clothing Industry (Chicago: Public Administration Service. 1938); and the testimony of l/owell B. Mason, 
former General Counsel for the National Recovery Review Board (The Darrow Committee) in Senate 
Committee on Finance, 74th Cong., 1st sess., Hearings on Investigation of the N. R. A., vol. I, p. 1118. 
Mason's testimony covering pp. 1095-1150 constitutes a sort of summary of the findings of the Darrow 
Committee. 

'« L. 8. Lyon, op. cit., p. 746. 

2riS;^25 — 40— No. II- -9 



120 CONCENTRA.TION OF ECONOMIC POWER 

riod stipulation.^^ In addition, "private price-fixing arrangements 
* * *, according to competent observers, flom-ished on a relatively 
large scale." ^° It was expected that an increase in wages and em- 
ployment would provide a firm basis of purchasing power for an 
upturn but price raising and other restrictive practices choked this 
off. "By the time wages were raised by the codes it was a question 
of catching up with prices, not of leading them up." ^^ That the 
lesson of N. R. A. was not sufficiently learned was indicated in 1937 
when again the hopes of large profits brought about a restrictive rise 
in prices. 

The N. R. A. served as a prominent example of the proposition that 
particular mterests in a narrow sphere are often at variance with the 
broad public interests. But since businessmen must first of all weigh 
the effects of policies on their particular concerns, it is natural that 
they should develop an attitude of mind, a body of preconceptions 
which causes them to act m ways conducive to their immediate 
interests rather than to the interests of the economy as a whole. 

Thus, the problem' now facing consumers and the Nation is the 
reconciiiatioii of both individual and public interests in big business. 
Consmners, as we have seen, are weak in this field, for their control 
is too diffused to be effective. To make up-for these deficiencies in 
their power, therefore, consumers and other groups, including aggrieve'3 
businessmen, call upon the Government for assistance. 

In a democracj^ liie extent of governmental activity and control 
is rcragnly in inverse proportion to the degree to which other agencies 
satisfv the needs and desires of the people. Prominent businessmen 
are trutfiiully arguing that the way to ease governmental interference 
is f©r lousiness better to satisfy the needs of the public. Thus the 
late J. O. McKinse}' has said : 

SpecializaUon and rapidity o"f economic changes tend to produce maladjustment 
in our econt/inic organization which leads .surely to government interference. 
Granted the first two conditions, the third follows inevitably. The only effective 
remedy for this condition is that business may be managed with a greater degree 
of efficiency so as to alleviate -the conditions which make possible the assumption 
of authority on the pa,rt of the Government.^^ 

The editofs of Fortune magazine contend that a fundamental 
change in attitude among businessmen has taken place in the last 
few years. Many executives, they believe, accept and advocate 
social responsibihty.^^ The statements of officials and the recent 
ennuai reports of some of the large corporations tend to substantiate 
this position. It is further bolstered by an opinion poll of business- 
men conducted by Fortune on the subject of 11 important items of 
New Deal legislation which affected business. In only one instance, 
^hat of the undistributed-profits tax, was there a preponderance of 
business opinion for outright repeal, and this action had been taken 
by Congress before the Qutcome of the survey was published. A 
graphic presentation of the results of this poll is given in chart X. 
The editors qomment that — 

With no clear-cut-majorities for the elimination from the statute .hooks of the 
remaining 10, it can be argued that so far as major principles oi reform are con- 

» Ibid., p. 570. 

*o Jules Backman, Government Price Fixing (New York: Pitman, 1938), p. 68. 

«i L. S. Lyon, op. cit., p. 761. - ■ 

•= J. O. McKinsey, Organization Problems Under Present Conditions, pp. 8-9. 

" See "Business and Qavernment," Fortiane, XXl (March J940), pp. 38-39. 



CONCENTRATION OF ECONOMIC POWER 



121 



Chart X. — Opinions of Businessmen on Recent Legislation * 



Of the following measures, which do you believe should be kept as they 
stand, which modified, which repealed? 



KEPT 



MODIFIED 



REPEALED 



DON'T KNOW 

CD 




• From Fortune, XX (October 1939), p. 53. 



122 CONCENTRATION OF ECONOMIC POWER 

cerned, the New Deal has produced nothing that business is not willing to have 
stand, at least with modifications * * *_ 

[Wiiilel big business, both manufacturing and retail, tends to be more opposed 
to the New Deal than small business * * * there is a strong inclination to 
accept as basically good many of the laws business considers need modification. 
There is a strong inclination, likewise, to suggest modification, rather than repeal, 
of the laws business considers most baneful.^* 

Perhaps business executives are becoming more professionalized. 
Perhaps, as John C. Baker suggests — 

executives may be assuming functions to society similar to those of doctors, 
teachers, scientists, and others in professional work. Such men are rewarded in 
other ways than merely by financial payments. Avarice, it must be remembered, 
is not the only motivating factor in human life. If the executive group takes on a 
professional status, payments may be smaller in cash, larger in other satisfactions, 
greatly simplified, and incidentally, executives may have a more peaceful existence 
and live longer. One important reason favors such a development. A quarter 
of a century ago, "business was business"; i. e., businessmen generally strove 
mainly for profits. Today the social implications of executive work have so 
changed that no longer can such men think of business chiefly as corporate 
profits. They must consider their decisions in terms of social well-being as well 
M.s in terms of dividends and personal financial reward.^^ 

Trusteeship, then, has broad appUcation. To observe its tenets, 
business executives must consider not only; their own immediate 
interests but also those of the disfranchised owners, the workers, 
the consumers, and finally, of that %^ent of the general public, the 
Government. Heretofore, the manager? of large corporatiohs have 
placed themselves in the most advantageous position. Their behavior 
toward owners, labor, and consumers is spotty — sometimes favorable; 
sometimes, as we have seen, quite the reverse. In spite of the change 
in attitude which may be taking place, there remain nevertheless 
many deficient portions in the trusteeship pattern. A problem of 
government, and especially of the Temporary N'ational Economic 
Committee, is to suggest ways in wliich the defective parts of the 
existing structure of trusteeship may be improved without weakening 
other parts of the economy. To a discussion of some such methods we 
now turn. 



>* "What Business;rhlnks," Fortune, XX (October 1939), pp. 52, 90. 
«» John 0. Baker, op. cit., p. 254. 



CHAPTER XI 
SECURING AND ENFORCING TRJSTEESHIP 

In seeking to make trusteeship more effective there is no reason for 
subjecting business and businessmen to more regulation than is clearly 
necessary. This is particularly true with respect to various formal 
controls which might be instituted. Under a philosophy of liberal 
democracy, individual liberty is to be furthered so long as it does not 
injure the rights and freedom of the majority. Complete liberty 
would, of course, result in chaos; and in the end no one would be 
free. Restrictions, therefore, must be established in order to prevent 
the few from infringing upon the liberties of the many. 

In controlling individuals it is likewise necessary, in line with a 
liberal democratic philosophy, that the methods be as informal as 
possible. Formal coercion is a last resort, drawn upon only when 
other devices fail. Similarly, in devising and installing such addi- 
tional regulation as may be necessary to make trusteeship in big busi- 
ness more effective, drastic measures should be avoided until it is 
certain that a milder course will not do. 

Our examination of the shortcomings of trusteeship indicates that 
some additional control over management is necessary. Depressions, 
wastes, losses to stockholders, mistreatment of labor, and discrimina- 
tion against the consumer should be eliminated so far as possible. To 
the administrative realist, however, it is apparent that excessive 
regulation may defeat its own purpose. If managers must take minute 
account of a multitude of rules, theh initiative may fail, authority may 
be diffused, and the whole administrative machinery slowed down or 
even stopped. Consequently, from the administrative as well as from 
the democratic viewpoiiit, informal or general devices may actually 
be more effective, all social values considered, than a rigid and complex 
system of formal regulation. The methods of securing more effective 
trusteeship which we shall discuss, therefore, will be general and 
flexible rather than exact and rigid. 

Fortunately, gregarious man usually responds as he is expected to. 
Most men will play the game according to the rules if the rules are 
known and accepted. Regarding the development of socially re- 
sponsible business leaders, for example, Wallace B. Donham, dean of 
the Graduate School of Business at Harvard, has said: 

If the community gets this social point of view, if it rather questions mere money- 
making, if money-making without social sta^ndards is frowned upon ind if real 
social accomplishment is esteemed * * * we shall get the real leaders in a 
sufficient number, because it is the approval of the trihe that determines the types 
of leadership exercised by its leaders, i 

It is usually when trusteeship is not expecte i of managers that they. 
fail to live up to its tenets. What is urge i1 y needed, therefore, is 

1 Wallace B. Donhara, "The Professional Side of Business Trf.nf.f;," in Business Management as a 
Profession, edited by Henry C. Metcalf (Chi.?<igo: A. W. Shaw, 1! .7'. rh. XITI, pp. 228-22fl. 

123 



J24 CONCENTRATION OF ECONOMIC POWER 

a wider knowledge and acceptance of its requirements, together with 
the development and application of other techniques whereby it can be 
made more effective. Much of what we shall discuss, therefore, is 
pointed toward supplying the various interested groups with informa- 
tion whereby they may judge trusteeship for themselvies, as well as 
toward suggesting certain structural changes which may make man- 
agement more responsible without unduly infringing upon essential 
administrative freedom. Because it is commonly supposed that 
boards of directors are the guardians of the interests of nonmanage- 
ment groups — particularly, of course, the owners — and because boards 
are formally desi^-no»^ for that purpose, our discussion may well begin 
with them. 

An approach through the hoards of directors. — The functions which 
boards of directors perform differ considerably as between theory and 
practice. The ideal pattern of board activities has been set forth by 
the late J. O. McKinsey: 

1 . It should be responsible for establishing the general objectives of the businef 

2. It should establish the major policies of the business. 

3. It should determine the organization structure of the business and select 
the major executives * * *, 

4. It should be responsible for "checking up" on the executives of the business 
to whom the responsibility for its administration has been delegated.* 

McE^insey recognized that the board is unavoidably dependent upon 
the major oflBcers of the company for much of the information necessary 
to iEtelligent action, but he nevertheless maintained' that it should 
constitute substantially more than a facade. A former Assistant 
Secr<?tary of Commerce, among others, also argues convincingly along 
similar lines.^ 

i We have already seen* that in practice many boards today are 
little more than formal ratifying bodies for the decisions of manage- 
ment. In many cases they could be eliminated and almost no one 
would realize it. Their important functions have been largely re- 
moved; a nearly inanimate body remains. However, in the past and 
in a few cm-rent instances, boards have demonstrated that they can be 
of value in improving administration and making it more sensitive 
to the demands of interested groups. Hence, rather than merely 
sorrowing over their demise and looking for a suitable substitute 
which may be difficult to find, it would be more profitable to revitalize 
the now decaying institution. Several possibilities are suggested. 

First, the present trend toward officer boards should be reversed. 
The mere fact that executives know more about a particular business 
than outside directors possibly can is no adequate reason for creating 
a management board. A director should have a knowledge of the 
business which he directs, but he does not need to know all of its 
details. His function is different from that of the executive. He must 
check on executives, for one thing, and this cannot adequately be done 
if the executive and the director are the same person. Moreover, the 
ingrowing tendencies of officer boards must be eliminated if a broad 
view of corporate policies is to be attained. "There are not enough 
outsiders on the board," one corporation executive complains. "We 

' J. 0- Mclpflsey, Fnneilons of Boards of Pireetors, Board Committees and OflSccrs, p. 4. 

• See Richard c. Patterson, "Wanted: Directors who Direct," New York Times Magazine, January 21, 
1940, p. 6. 

* In eh. m. 



CONCENTRATION OP ECONOMIC POWER 125 

need more men who are aware of national trends." '^ If trusteeship is 
to have any broad, effective meaning, men who can see things in per- 
spective are indispensable. The head of one of the Nation's largest 
concerns maintains, for example, that "officers universally lack per- 
spective." 

Stating a need for effective outside representation on the boards of 
the great corporations and attaining that goal are, unfortunately, two 
different things. However, it might be of substantial assistance if 
some governmental body, such as the Temporary National Economic 
Committee, were to deplore the present tendency toward officer boards 
and to underline the opinions of corporate officials who feel that the 
demise of the outside board will ultimately be a serious thing for 
business. It may not be necessary to enact legislation requiring, say, 
that no corporation engaged in interstate commerce may have more 
than two-tiiirds of its board members composed of present or past 
officers of the company or its affiliates Less drastic means should 
first be tried, but the possibilities of such legislation might meanwhile 
be studied. 

In securing outside representation on boards of directors it is not 
necessary nor even desirable that members be selected specifically to 
represent special interests. Our observation has been that ' the 
members of boards, committees, or cormnissions who are expressly 
chosen because of a particular interest, too often represent and deiend 
it to the unfortunate exclusion and possible detriment of others. In 
selecting directors, therefore, it is clearly advisable to obtain men whe 
have an extensive specialized knowledge together with an ability to 
see things whole and in relation. Then their attitudes will fit mto 
the total pattern which must be created. Patchwork is no substitute 
for mosaic in the development of corporate policy. 

In addition, there should be a limit to the number of directorships 
which one person may hold. We have heard of a case where one man 
was a member of more than 50 boards; obviously he could not be 
active on any but a few". This type of board member usually serves 
merely as window dressing for the corporations involved.® The 
subterfuge operates at cross purposes to responsible business trustee- 
ship because people depend on the integrity of those whose names they 
see in the annual I'cports, irrespective of the degree of influence they 
may exercise. 

A limitation on liie numbei' uf directorships which ane man may 
hold would also reduce corporate combinations through interlocking 
directorates, now one of the methods of achieving various degrees of 
monopoly.^ It would also help to insure the safety of stockholder 
interests which might otlierwise occasionally be sacrificed to those ot 
outside, possibly competing companies on whose boards a particulaiv 
director also serves. 



» In a <-,tudy of boards of directors, E. H. Sehell found that i-i 1928 only 8.8 pcrcont of the diroctors of 62 
large manufaoturinc companies were chosen primarily because of their knowledtre of external '•iisiness 
conditions. See his "Trends in the Functions and Composition of Boards of Directors," in Handbook of Busi- 
ness Administration, edited by W. J. Donald ("Sew York: McGraw-Hill, 1931'). pp. 401, 40.5. 

» Table 11, p. 6, ihdJcatcs the extent to which a few men hold many directorships in a limited number of 
thelarpest corporations. 

' Information of a related nature in possession of the Securities anu Exchange Commission wouk. oe of 
material assistance in showing intercorporate combinations and individual influence throuph stockholdings. 
To this end it would be valuable to those interest'^d and to the general ruibiic if the Commission would issue 
an annual report similar to its I93fi Official Summary of Holdings of Officers. Directors and Principal Stock- 
holders. Such information should be more currently avpilable than it is at present. 



126 CONCENTRATION OF ECONOMIC POWER 

Finally, a limitation on the number of directorships would make 
it possible for a man really to direct in one or a few companies. Talent 
and effort can be spread so thin as to be ineffective. 

As regards remedies, the public disapproval of multiple director- 
ships may bear some fruit. In addition it might be practicable to 
require that all corporations engaged in interstate commerce shall 
apprise their stockholders, in annual reports or requests for proxies, 
of the number of positions held by each director or nominee, and the 
names of the companies involved. Stockholders would then realize 
that many directors contribute their names only and the situation 
might correct itself. A last resort would be the enactment of legisla- 
tion to limit the directorships which may be held by one person to 
two or three, and those in noncompeting concerns. 

In the third place the effectiveness of boards might be increased by 
limiting their size. Of the 20 largest industrial corporations, the 8 
largest utilities and the 8 largest railroads in 1939, nearly half had 
boards with 15 or more directors. On the whole it was the smaller 
boards which were the more active in corporation affairs. While it 
is not possible to establish the optimum number of directors in every 
case, our observation indicates that in general 10 is better than 15, 
while a group larger than 15 rarely operates successfully as a unit. 
Although it may be inadvisable to limit the size of boards by legisla- 
tion, limitation might become a more or less automatic concomitant 
to the suggestions which we have made as well as to some which follow. 

It is not necessary that directors give all of their time in order 
properly to discharge their functions. Full-time board members 
tend to divide administration among themselves and so to destroy 
unity. The board should be a policy and control group, not an ad- 
ministrative body. Managers are chosen for the latter task. If a 
man held but a limited number of directorships and applied himself in 
those positions, he could gain an adequate knowledge of the affairs 
of the companies involved and at the same time develop other inter- 
ests which would increa^ his value as a director. The appointment 
of committees and of staff employees who would gather information 
for the use of directors would help them in the important decisions 
which they must make. Such a procedure would be in keeping with 
American tradition. 

If directors are really to direct, they must be appropriately paid. 
A nominal figure implies that their contributions are equally nominal. 

A common director's fee in the larger companies, for example, is 
$20 a meeting, plus traveling expenses if necessary. With monthly 
meetings — weekly gatherings are rare — this is an insignificant annual 
sum * for a man who is liberally compensated m his primary position. 
It is now time to pay directors an amount sufficient to elicit their 
best efforts.^ Although it is not feasible to require any given level of 
remuneration by legislation, it would nevertheless be useful if voices 
were raised in support of adequate compensation. The Temporary 
National Economic Committee can be of valuable assistance in this 
effort. 

Finally, stockholders should be given more information about direc- 
tors. In the annual report or in requests for proxies the directors or 
nominees should be listed, each with his qualifications, the number 
of other directorships which he holds and the companies concerned, 

9 Cf. E. H. Schell, op. cit., pp. 408-409. 
• Cf. R. C. Patterson, op. cit., p. 18. 



CONCENTRATION OF ECONOMIC POWER 127 

and his attendance record if he is already on the board. It might 
even be desirable to require that men may be nominated by the owners 
of any 10 percent of the voting stock and that the names and qualifi- 
cations of such men be circulated to the stockholders in advance 
of the annual meeting. While the management's slate would probably 
continue to be elected intact, such a procedure might nevertheless 
compel managers to select qualified men. Even if such a choice were 
not offered the stockholders, the other information we have mentioned 
might discourage mere figureheads from accepting off"ers of director- 
ships, and might also discourage management from making the offers 
in the first place. There is little valid objection to furnishing this 
information, but the mere suggestion may be insufficient. The matter 
could be covered, if necessary, by legislation so far as interstate com- 
panies are concerned. 

In summary, it must be recognized that directors must be expected 
to direct if they are to gain the desired degree of influence. In addi- 
tion, men with outside views and interests should be elected to boards, 
the number of directorships held by any one man should be limited, 
boards should be kept workably small, directors should be appropri- 
ately remunerated, and owners should be supplied with adequate 
information about their representatives. Trusteeship has suffered 
because directors have been remiss in their legitimate duties. Per- 
haps some of their faults can be corrected through the methods we 
have indicated. 

The use of publicity. — Dennison and Galbraith have aptly com- 
mented that "business operations should be brought into the broad 
daylight and we look upon this, of itself, as a wholesome influence in 
encouraging what is good and discouraging what is unwholesome in 
the business world, and thus as reducing the extent to which regula- 
tion need go." ^° It is only through a widespread knowledge of busi- 
ness facts that some of the basic assumptions of competitive economic 
theory have any validity. It is incongruous to argue that a customer, 
a worker, or an investor is at liberty to direct his talents or his assets 
into the channels most beneficial to him if he has only a hazy idea as 
to where or what those channels are. Adequate publicity thus serves 
as an aid to achieving trusteeship as well as a substitute for more 
drastic methods of regulation. 

When the economic machine becomes stalled or when waste occurs, 
investors, managers, workers, and consumers all suffer. To the extent 
that adequate information would help management to act wisely, to 
direct economic efforts into the best channels, to forestall economic 
crises by coiTecting unwise action before it is too late, executives 
would be in a better position to discharge their obligations as trustees. 
The information which they require is of several kinds. 

First, extensive reports on production and sales, available to every- 
one interested, would be of assistance to managers in deciding on plant 
expansions, production plans, and in the development of new markets. 
Much of the contributions of investors could thus be saved and one 
apparent cause of depressions removed through the resultant increase 
in the accuracy of business judgment. Thus, managers could more 
readily discharge this phase of their duties as trustees. 

Information of these types would not destroy management's incen- 
tive to develop new methods because trade secrets could be guarded 

'f Dennison and Galbraith. op. cit., p. 119. For fuller treatment of several of the ideas presented in this 
v-otion the rtadT is ii'forred to (heir book. 



128 CONCENTRATION OF ECONOMIC POWER 

and the patent system resorted to. Nor does the objection that it 
gives competitors an unfair advantage carry sufficient weight. While 
it is true that the rivals of a given company would know more about 
its affairs than is now the case, it is likewise true that the managers 
of that company would know more about the affairs of its rivals. The 
advantages should, on the whole, more than offset the drawbacks, for 
all would profit through better business judgment. 

Publicity on wages and hours for specific companies would be of 
special value to labor. Monthly or quarterly reports on rates of pay 
and hours of work for particular groups of employees, and the number 
employed in each class, would benefit labor in two important ways: 
It would reveal employment opportunities and it would shine the 
white light of public knowledge upon the substandard employer. The 
latter would serve greatly to increase the effectiveness of managerial 
trusteeship toward labor. 

Reports of the types we have mentioned should be blended with 
those currently sent by business to the Federal Government. The 
elimination of duplication would go a long way toward gaining better 
cooperation with business in putting such a program into effect. 
Moreover, the whole of the information would then be more readily 
available and useful to interested persons. 

A further refinement in this reporting plan is suggested by the 
present practice of some corporations. In an attempt to decentralize 
administration, subordinate executives are given substantial freedom 
to act when the occasion arises without consulting their superiors; or 
they may be allowed to ignore a given company policy or headquarters 
recommendation if they feel that they have a better method. How- 
ever, when an executive acts in line with this freedom Jie must be 
ready with jjis reasons for doing so. In this way freedom is accorded 
but made responsible. Our observation indicates that the method is, 
usually successful. 

This techniqu'3 might usefully be applied to the reporting system 
which we have suggested. Our need today is to increase production, 
consumption, and employment. To this end it might be required that 
whenever the managers of a company decide to decrease employment 
or production they present to the Government their reasons for such 
action when they report the change. The agency to which they 
report should not have the power to disallow the modifications. It 
should, however, be able to require additional information wlien that 
submitted is inadequate. Such a method of encouraging business 
responsbility without destroying justifiable freedom of action merits 
serious consideration. We believe that it might be of substantial 
assistance in increasing the trusteeship of big business toward the 
economic needs of the Nation. 

A further type of publicity relates to the responsibility of business 
toward consumers. Without adequate information, consumers are at 
the mercy of an imscrupulous or careless seller. If they had a better 
knowledge of quality and if there were a standardization of grades, 
they would be more intelligent buyers. This in turn would have the 
effect of encouraging responsible sellers and penalizing the vendors of 
inferior merchandise. Thus, trusteeship m relation to the consumer 
would be enhanced. 

The Federal Government already has the basic machinery for rating 
finished products in both the producer and consumer goods fields. 
The Bureau of Standards tests a wide variety of products, from steel 



OONGENTKATION OF ECONOMIC POWER 129 

girders to thermometers. The Department of Agriculture carries 
on research in connection with the most common items of consumer 
goods, particularly those quite closely identified with agriculture. 
With these agencies as a nucleus, it would not be difficult to expand 
the Government's testing and grading activities. To be really 
effective, however, the results of all tests should be freely accessible 
to producers and the general public alike. The vendors of superior 
goods should not object, while those who ignore their trusteeship 
duties would be prodded into better performance. 

In summary, therefore, publicity directed into the proper channels 
and given a continuing rather than a sporadic nature would have 
great value in improving trusteeship without substantially limiting 
the freedom of initiative so essential to vital administration. In 
addition to the increased information on directors which is desirable, 
the light of continuing pubHcity should be thrown upon production, 
sales, inventories, prices, wages and hours, and the quality of goods. 
In this way, managers who are deficient in trusteeship may be stimu- 
lated to more acceptable behavior and, at least as important, the 
well-intentioned managers would be able more intelligently to exercise 
their business judgment. 

Direct responsibility through legislation. — Since managers have in 
effect assumed a fiduciary position in relation to stockholders, their 
subjection to a control similar to that of ordinary trustees might be 
assumed. While it is true that they should be held more responsible 
than heretofore, however, we do not advise that stricter supervision 
be immediately extended to the management of the large corporations. 
There are two reasons for this. First, if the less formal methods 
• which we have recom.mended are sufficient, there is no point in im- 
posing further regulation. In the second place, an adequate tra- 
ditional base does not as yet exist on which to erect such a structure. 
To be effective, laws must have public support based both on need 
and tradition. The methods which we have suggested fit in with 
traditir and should be tried first. Later extensions are a matter for 
later consideratian in the light of the then current facts. 

Nevertheless, there is at least one justifiable extension of control in 
addition to those we have recommended, which might be met by 
State or Federal legislation as regards large interstate corporations. 
When certified public accountants audit the books of such a concern 
they should, of course, satisfy themselves they are "in accordance 
with accepted principles of accounting," but in addition they should 
sample the accounts to see that they are in themselves correct. The 
mere appearance of conformity to rather nebulous principles of ac- 
counting is not enough. ^^ 

1' For example, the accounts of the crude-drug division of McKesson & Rohbins were kept in superior 
shape by F. T>. Coster, even though it was here that the removal of millions of dollars of the company's 
funds was accomplished. See "McKesson & Robbins: Its Fall and Rise," Fortune, XXI (March 1940), 
p. 72 fT. Moreover, accounting principles pre far from settled. Illustrative of this is a study made by 
H. C. Greer. He analyzed and compared the annual financial statements of 20 industrial enterprises 
over a period of 8 years. " These statements bore the approval of certified public accountants, indicating that 
the accounts h;i-''"heen kept "in accordance with accepted principles of accounting." In spite of this, he 
found a "lack ^.-'uniiur.'^itv in the treatment of items and transactionsof identical character • * * suffi- 
cient to conv't losses into profits, to alter materially the values assigned to important assets, and to render 
the several stalsments wholly noncomparable except with substantial revisions in the interests of consist- 
ency." More specifically, he found that the application over the S-year period of the most restrictive 
interp'etation of profits used by the companies "would have produced an aggregate net profit for all the 
companies combined of about $125,000,000, while the most liberal application, if consistently followed, 
would have produced an aggregate profit of about .$27.5,000,000. It is noteworthy also that none of the 
difTerences result from the difficulties of measurement of values (in which accounting judgment is considered 
SQ important); they arise exclusively from differing opinions as to -what constitutes a profit."— Howard C. 
Greer, "What Are Accepted Principles of Accounting?" The Accountiiig Review, XIII (March 193Si, 
pp. 25-31. 



130 CONCENTRATION OF ECONOMIC POWER 

There is an obvious remedy for many of the deficiencies of manage- 
rial responsibihty which has been the subject of considerable discus- 
sion. That is the removal of the laxness, conflict, and even compe- 
tition of State incorporation laws by requiring uniform Federal 
charters for interstate corporations.*^ There is much to be said 
for this procedure and it merits more consideration than we may 
give it here. It should be pointed out in passing, however, that 
Federal incorporation is not a prerequisite for Federal control over 
interstate companies. That may be accomplished directly. So the 
information and other items which we have mentioned may be gained 
by direct, specific legislation if necessary. This approach, without 
uniform incorporation, would, moreover, have the effect of regulating 
by Federal action phases of corporate functions which should be so 
controlled, while the remainder would properly be left to the States. 
Such a procedure has not only practical advantages but fits into the 
American tradition of government as well. 

Conclusion. — A widespread, favorable attitude of mind is a first 
essential to effective trusteeship in big business. People must expect 
and assume that managers will look out for interests other than their 
own. Managers in their turn will then attempt to live up to expecta- 
tions. It is important, therefore, that any additional regulation, 
whether formal or informal, should be designed to stimulate and 
preserve this favorable attitude among corporation executives. Man- 
agement clearly controls the large concerns, and its cooperation is 
essential to an economy of abundance and fair treatment. Exe'cutives 
must more clearly realize that restriction by individual companies is 
disastrous when universally practiced. The methods which we have 
suggested for securing a more effective trusteeship, therefore, are 
modeled in such a way that the necessary attitudes of both business- 
men and the public may at least be maintained and possibly even 
improved. 

The boards of directors of the large corporations may be more effec- 
tive instruments of trusteeship if they are modified in several ways. 
The trend toward eliminating outside directors must be reversed, the 
number of directorships held by any one man should be limited, boards 
should be kept reasonably small, the directors should be paid more, and 
more expected of them. Much of this can be accomplished by public- 
ity of various kinds which we have suggested; some may require 
legislation. 

Trusteeship can also be made more effective through publicit}'' on 
production, sales, wages and hours, and the qualities of goods. The 
light of day on corporate activities can have naught but a salutary- 
effect. Moreover, if such publicity is continuous instead of sporadic, 
it will be more effective and at the same time less disruptive to 
businessmen. ^ 

In general, as far as the element of trusteeship is concerned, legis- 
lation providing for more direct supervision of business aft"airs should 
be kept in reserve until it becomes unmistakably necessary. A co- 
operative working out of our problems along the lines we have mdi- 
cated may in the long run be more productive than more drastic" action. 
An economy of abundance is our goal. An improved sense of trustee- 
ship would materially hasten its achievement. 

" For a comprehensive presentation of proposals on Federal incorporation, see the Federal Trade Com- 
mission's Utility Corporations, Pt. 69-A, S. Doc. No. 92, 70th Cong., 1st sess. (1934). 



CHAPTER XII 
SUMMARY OF FINDINGS AND RECOMMENDATIONS 

The giant corporation of today is almost as revolutionary in its 
social effects as the invention of the steam engine over a century and 
a half ago. Leaving aside, as we have, the question of limited liability 
and dealing solely with the obtrusion of bureaucracy and the increas- 
ing importance of trusteeship in big business, the evidence to support 
so sweeping a statement clearly emerges from the preceding pages of 
this study. 

The central problems with which we have dealt are as old as state- 
craft. What distinctiveness they possess lies in their relatively recent 
appearance in the business organizations of western European coun- 
tries, and particularly in those of the United States. 

The underlying problem of trusteeship may be simply stated : When 
power becomes concentrated in the hands of a few persons, can they 
be influenced to wield their authority in behalf of interested groups, 
and to restrain a desire to aggrandize themselves through their stra- 
tegic positions; or, if those groups are to be protected, must formal 
sanctions be established which possess coercive power? 

The age-old question of bureaucracy may also be reduced to simple 
terms: When any human organization becomes large, hierarchical, 
professionalized, and operated by formal rules of teamwork, are the 
resultiDg losses of individual initiative, freedom to adjust to changed 
circumstances, dispatch, efficiency, and sensitivity to consumer de- 
mands, so inherent in the complex mechanism that they are inevitable 
and ineradicable; or, on the other hand, can these socially objection- 
able aspects of large size be eliminated by careful planning and skillful 
management on the part of those in control? 

These are practical problems, but they have far-reaching social 
consequences. Upon the ultimate answer which careful and reliable 
research may provide depends the substantiation or disproval of what 
is perhaps the basic assumption of the free-market, competitive sys- 
tem: namely, that the social advantages of relatively small, compet- 
ing business organizations result in greater efficiency of management 
and attention to consumer demands, and that these benefits are passed 
on to the consumer. 

Conversely, it is likewise assumed that monopolistic and semi- 
monopolistic conditions inevitably result in loss of price flexibility 
and the gradual disappearance of resiliency in managerial outlook; 
hence, the conclusion that flexibility is so important that competition 
must, if necessary, be enforced by governmental sanction. If, how- 
ever, it should prove to be true that the undesirable aspects of bureau- 
cracy can be obviated and that price inflexibilities are not necessarily 
inevitable, this discovery added to the admitted advantages of large- 
scale enterprise might conceivably change our whole attitude toward 

131 



232 CONCENTRATION OF ECONOMIC POWER 

the type of industrial system which people consider best suited to 
their collective interests. The obvious question, therefore, is whether 
the best features of the competitive system can be preserved under 
conditions of increasingly limited competition. 

Our study has not attempted to resolve this central problem of 
political economy; rather, after an examination of the vast published 
material in this field, supplemented by our own first-hand investiga- 
tion of a selected group of large corporations, we have attempted to 
isolate the principal manifestations of bureaucracy, to find the con- 
tributing causes, and to indicate what steps progressive firms have 
taken. to eliminate its undesirable aspects. When the data seemed 
to support such a conclusion, we have suggested the point at which 
.remedial measures appear ilseless or of limited effectiveness. For 
convenience, bureaucracy has been divided into two categories, the 
first structural, the second personnel. 

Among the outstanding structural causes of bureaucracy are the 
separation of ownership and control in the modem corporation; the 
gradual retrogression of ownership; the diffusion of authority among 
parties of interest; a declining effectiveness of representative boards 
of directors; the necessity of formal rules of management, possessing 
almost the force of law; institutional lethargy resulting from tradi- 
tion and organizational resistance; inadequate definition of the scope 
of authority among the various departments and executives; the dif- 
ficulty of effective communication throughout a complex hierarchical 
structure; excessive supervisory loads; and the production of special- 
ists rather than men of broad outlook, with a consequent .loss of 
perspective and statesmanship. 

As possible correctives to these structural causes of bureaucracy, 
we have discussed the desirability of a clear definition of objectives, 
responsibilities, and authority; the periodic reexamination and cor- 
rection of administrative methods, which we have included under 
preventive maintenance; the use of standard practices and improved 
methods of coordmation and control; the development and use of 
unit measurements of performance; decentralization of operations 
and authority; and increased attention to public-relations methods 
which point both inwardly and outwardly. 

The executive needs of a corporation are in direct proportion to 
its size and complexity, and it is not surprising that the demand for 
top-notch executives exceeds the available supply. In our analysis, 
therefore, we have dealt with the requirements of executive leader- 
ship, the age factor, overspecialization, seniority, and devices produc- 
ing a high level of morale. 

It should be clear that our findings on bureaucracy do not point to 
the need for additional legislation. We suggest, rather, that the 
Temporary National Economic Committee invite business to recog- 
nize more clearly the causes and cures of bureaucracy, for, strange to 
say, the problem has not received the attention it deserves in view 
of the interests which are at stake.' This apathy has been reflected 
in the relative lack of detailed studies. We also suggest the possi- 
bility of enlisting the help of the Department of Commerce in increas- 
ing the productivity of industry by establishing a unit which would 
deal with problems ,of large-scale organization and management. 



CONCENTRATION OF ECONOMIC POWER J 33 

Nonlegislative factors must also be chiefly relied upon in improv- 
ing managerial trusteeship. Although education is better than coer- 
cion, it must be well thought out and it must be effective. Adminis- 
trative realists believe that excessive controls may defeat their very 
purpose, for rigidity secured through complex rules may be less 
desirable than some of the shortcomings traceable to present free- 
doms. Thus, not only from the standpoint of democracy, but also 
from that of practical administration, education in responsibility and 
self-restraint is to be preferred to fiats of law which place too great a 
burden upon industry. 

This is not to say, however, that concrete proposals and remedies 
are wanting. First of all, the boards of directors of the large cor- 
porations must be made more effective. If present tendencies con- 
tinue the board will become moribund, due largely to the failure of 
businessmen to realize the shortcomings of the expert. Corporation 
after corporation has replaced its layman board with an officer 
board. They seem to have forgotten that the ttue function of a 
board of directors is to be representative, to bring outside viewpoints 
to the company, to cany back to the aeveral iaterests a,nd to the 
public at large a report on stewardship, and to command confidence 
and respect because of the established abilities and public-spirited 
attitude of the nonofficer members. We agree with the executive 
who has complained: "There are not enough outsiders on the board. 
We need more men who are aware of national trends." 

The Temporary National Economic Committee, therefore, would 
perform a valuable service if it were to emphasize in unmistakable 
terms the necessity of preserving democratic control and responsible 
self-government in the business domain. The possibility of requiring 
nonofficer directors by specific statutory provision should be studied, 
but we suggest that less drastic means should first be tried. Well- 
thought-out advice and publicity, for example, might discourage 
multiple directorships, for, as we have shown, the functions of a lay 
board-member cannot possibly be served when the number of such 
positions is high. Large corporations might be required to apprise 
their stockholders of the number of such offices which their, own 
directors hold, but here also, limiting legislation should be regarded 
&3 a last resort. Many boards are too large to be effective, but again 
a legislative remedy is probably not necessary. Furthermore, if 
directors are to serve in a vital capacity, the average scale of remunera- 
tion should be increased, and we recommend that careful attention be 
given to ways and means of achieving this desirable result. 

Finally, stockholders should be given more information concerning 
board members than they now receive. This should include a state- 
ment of the directors' qualifications, the number of other director- 
ships held, and their attendance at board meetings. It might also be 
desirable to consider ways of making the nominating preferenees of 
stockholders more effective. 

Other tyjDes of publicity are also inoicated. Continual publicity 
should be given to production, sales, wages and hours, employment, 
and the quality of goods. All except the last could be gained through 
periodic reports required of individual companies. In addition it 
might be advisable to require that reasons be given for proposed 



134 CONCENTRATION OF ECONOMIC POWER 

changes which would have the effect of decreasmg economic activity. 
Pubhcity on the quality of goods could be obtained by expanding the 
activities of the Bureau of Standards and appropriate testing sections 
of the Department of Agriculture and their findings made freely avail- 
able. Legislation would, of course, be required for such regulation 
by publicity, but the results would be highly beneficial. On the one 
hand, managers who are deficient in trusteeship would be spurred to 
more acceptable behavior and, at least as important, those who are 
well-intentioned would be able to exercise their business judgment 
more intelligently. 

Other more direct legislation may be indicated. Public account- 
ants, for example, should be required to satisfy themselves not only 
that books have been kept in accordance with accepted principles but 
that the accounts are themselves correct. Uniform Federal incorpo- 
ration merits further examination, but it is not a prerequisite for 
additional regulation and may even be a practical handicap. In 
respect to trusteeship, it should be emphasized that any additional 
legislation providing for more direct supervision of business affairs 
should be held in reserve until it is clearly necessary. A cooperative 
solution of our problems along the lines we have indicated may in the 
long run be the more productive course. 

In summary, bur suggestions for action to the Temporary National 
Economic Committee may be listed. 

On bureaucracy we suggest — 

1. That the committee adequately remind business leaders of the 
problems of bureaucracy, its elements and causes, and the available 
remedies." 

2. That it examine the possibilities of establishing a unit in the De- 
partment of Commerce to study administrative problems and to help 
business in their solution. 

On trusteeship we suggest — 

1 . That the committee give adequate publicity — 

(a) To the requirem.ents of trusteeship in order to help build 
a strong public expectance of such responsible behavior. 
(6) To the need for nbnofficers on boards of directors. 

(c) To the desirability of limithig the num.ber of director- 
ships which one person may hold. 

(d) To the desirability of m.ore adequately paying directors 
and of expecting them, actually to direct. 

2. That it recommend legislation which will require — 

(a) That corporations engaged in interstate commerce 
furnish periodically to their stockholders data on their directors, 
including qualifications, other directorships held, and attend- 
ance at board m.eetings. 

(b) That such corporations furnish prom.pt and complete 
information to the Federal Government upon production, sales, 
employm.ent, wages and hours, together with reasons for 
changes which will m.aterially decrease the level of economic 
activity; such data to be freely available to all interested 
persons, both by classifications and by individual companies. 



CONCENTRATION OF EXX)NOMIC POWER 135 

(c) That the Bureau of Standards; and the consumer activi- 
ties of the Department of Agriculture) be expanded to conduct 
comprehensive tests on products and to- make the results freely 
available. 

(d) That public accountants certifying the accounts of such 
companies not only satisfy themselves that the records have 
been kept in accordance with accounting principles but also 
that the accounts themselves appear to be correct. 

3. That the committee study the possibilities of legislation to be 
enacted if the milder forms of regulation which we have suggested 
prove inadequate, such legislation to require — 

(a) That some set minimal proportion of the members of 
boards of corporations engaged in interstate commerce be 
outside, nonofficer, persons. 

(b) That no person hold more than a set minimum of direc- 
torships. . 

(c) Uniform Federal incorporation of corporatibtis engaged 
in interstate commerce. 

(d) That the practical ' effectiveness of the stockholder 
privilege of nominating directors be enhanced. 



258325^-40— No. 11 10 



INDEX 



Page 



ADMINISTRATION. {See Administrative control; Coordination; Lead- 
ership; Management; Organization; Policy; Rules in Administration; 
Trusteeship.) 
ADMINISTRATIVE CONTROL AND COORDINATION IN IN- 
TERNAL ADMINISTRATION 76-82,99-100,102 

DiflBculty of communication and integration a cause of bureaucracy 42-43 

{See also Rules in administration.) 
AGRICULTURAL COMPARED WITH INDUSTRIAL EMPLOY- 
MENT 4 

ALEXANDER THE GREAT ' 64 

AMALGAMATED CLOTHING WORKERS. . . 97 (note) 

AMERICAN TELEPHONE & TELEGRAPH C0._ ix, 38-39, 73, 78, 79, 84, 90 

ANTITRUST LAWS 1 4, 119 

ARMOUR & CO - 25,38 

ARNOLD, THURMAN 4 (note) 

AUTHORITY: 

Clear definition of, as a corrective for bureaucracy .' 72-73, 99, 101 

Command versus advice -.- 38 

Diffusion of, as a cause of bureaucracy 37 

In bureaucracy- 31 

Inadequate definition of, a cause of bureaucracy 41-42 

BACKMAN, JULES • 120 (note) 

BAKER, JOHN C, 19 (note), 91 (note), 92, 111, 112 (note), 113 (note), 114-115, 122 

BALTIMORE & OHIO RAILROAD 45 

BARNARD, CHESTER !„. 38 (note), 41, 63 (note), 64, 65, 86 (note), 88 

BECK, JAMES- __- -'.. 53 

BELL, ALEXANDER 10 

BELL SYSTEM. {See American Telephone & Telegraph Co.) 

BERLE, ADOLPH A 4 (note), 11 (note), 21 (note), 22, 64, 108 (note) 

BIG BUSINESS: Nature and scope {see also Concentration; Corpora- 
tions) : 3-27 

BLAISDELL, T. C i_- 119 (note) 

BOARDS OF DIRECTORS: 

Committees '. ^. 25 

Composition and size _- 24 

Functions of 1 23-25 

Methods of making them more effective 124-127, "133-135 

Officer boards as a contributing cause of bureaucracy 37 

BOGARDES, E. S : . 85 (note) 

BONUS. {See Executive compensation.) 

BROWN, DONALDSON 25 

BROWN, LEWIS H 116 (note) 

BUDGET: 

As a control device in corporations -. 81 

As a device for defining objectives .: 72, 99 

BUREAUCRACY: 

Administrative correctives of 71-103 

Attainment of high morale 93-98, 100, 102 

Decentralization 82 

Definition of objectives, responsibilities and authority 71-74, 91, 101 

Emphasis on public relations 83-84, 100, 102 

Improvement of devices of internal coordination and control — 76-82, 

99-100, 102 

Personal factors 85-98, 100-103 

Preventive maintenance applied to administration. _ 73-74, 99, lQl-102 

137 



138 INDEX 

BUREAUCRACY— Continued. 

Administrative correctives of — Continued. Jfage 

Provision of progressive management 85-93, 100-103 

Recommendations to Temporary National Economic Committee. 103 

Standard practices, use of .4-75, 99, 102 

Summary 101-103 

Causes of , 36-67 

Decline of tiie prod of competition 65-67 

Desire for power 64-65 

Diffusion of authority 36-37 

Formalization of interpersonal relationships 38-40 

Habit and inertia . 62-63 

Inadequate definition of authority and responsibility 41-42 

Ineffective leadership 44-54 

[nstituti onalism .; 40-4 1 

Low level of morale ■ 54-62 

Personnel causes (summary) 67 

Privitization of functions * 63-64 

Separation of ownership and control 36 

Structural causes (summary) 43 

Characteristics of 31-35- 

Comparison of business and government 31-32, 99-101 

Defined . -..J. . 31 

Questions raised by size 4 

Related to separation of ownership and control 27 

Result of size and .complexity -_ 3 

Summary of elements , causes and correctives 13 1-35 

BUSINESS AND GOVERNMENT: Administrative comparison of: 

Applicability of administrative correctives of bureaucracy ^'- 99-101 

Common characteristics of bureaucracy.. 31-35 

Diffusion of authority . 37 

Executives:- 

Ages of 47-49 

Broadness of outlook of 50 

• Factors necessary to attract executive talent 54 

Recruitment of ^ 52 

Summary on leadership. ._ ._ 54 

Tenure of.l 53 

Factors contributing to morale ' 58-62 

Power over persons 31 

CENTRALIZATION IN ADMINISTRATION. (See Decentralization.) 

CHAMBER OF COMMERCE OF THE UNITED STATES.. 9 

CHAMBERLAIN, EDWARD G._: . 14 (note) 

CHESTER, C.TVI 110 

COLE, TAYLOR . . 31-32,64, 97 

COMMITTEES IN COORDINATION . 77-78 

COMMUNICATION: 

Difficulty of, a cause of bureaucracy.. 42-43 

In coordination and control *. 76ff, 102 

COMPETITION: 

As a market force 14ff, 108 

Decline of, and the necessity for trusteeship 18, lOSflF 

DecUne of, as a cause of bureaucracy ^ 65-67 

Related to bureaucracy ,_ , 33 

Monopolistic or imperfect 14 

CONCENTRATION: 

Corporate assets 4 (face) , 5-6 

Prominent interest groupings 8-9 

Results of process of '. . 14flf 

Through financial institutions j. 7-8 

Through minority stock ownership __- 7 

Through interlocking directorates 6 {f&?.e), 7-8 

Through trade and business associations. . . 9 

Various industries j 6~6 

CONNERY, ROBERT H: . . -. n9(note ) 

CONSUMERS: Responsibility of managers to. 118—120 

CONSUMPTION: As the end purpose of production 116 

CONTROL IN ADMINISTRATION. (-See Administrative contrcl'i 



I 



INDEX J 39 

CONTROL OF CORPORATIONS: Page 

By management 20ff 

Focus of L. 22-27 

Location of 21-22 

Separation from ownership 3, 19-27, 108 

CONTROL OVER PRICES: Administrative versus market 14ff, 108 

COOKE, MORRIS L i 97 (note) 

COORDINATION: 

And control in internal administration 76-82, 99-100, 102 

Difficulty of communication and integration a cause of bureaucracy _. 42-43 

Made difficult by size 3 

CORPORATIONS: 

Development of giant , _. 3 

Dependence upon corporate form for giant companies 10 

200 largest nonfinancial: 

Assets of 4 

Concentration of industry in 4-6 

Interlocking directorates in • 6-7 

Location of control of 21-22 

Stockholdings in 11-13 

COSTER, F. D 1... 115, 119 (note) 

COSTS AS A MEASURE OF EFFICIENCY 76-77 

DECENTRALIZATION 82-83,99, 102 

DELEGATION OF 'AUTHORITY; (See Decentralization.) 

DENNISON, HENRY S 14 (note), 15, 18 (note), 19 (note), 39, 127 

DIEMER, HUGO 23 (note) 

DIMOCK, MARSHALL E 42 (note), 

59 (note), 82 (note), 85 (note), 86 (note), 94 (note), 101 (note) 
DIRECTION. {See Objectives, Policy, Rules in administration.) 

DONALD, W. J ^-. ._.. 89 (note), 125 (note.) 

DONHAM, WALLACE B 123 

DU PONT 8-9,24-25,39,91 (note) 

DURANT, WILLIAM C 10 

EFFICIENCY : Difficult to measure under monopoly 66 

EMMERICH, HERBERT ^_. 44 

EXCEPTION PRINCIPLE OF MANAGEMENT..: 82 

EXECUTIVE COMPENSATION 53-54, 90-92, 100, 108, 111-116 

EXECUTIVE EMPLOYMENT, STABILITY OF 110-111 

EXECUTIVE LEADERSHIP. (See Leadership.^ 
EXECUTIVE RECRUITMENT: 

Factors necessary to attract executive talent • 53-54 

Finding and developing leaders 85-93, 100-103 

Merit versus seniority ajid "politics" 50-52 

FESLER, JAMES W 99 (note) 

FILENE, E. A -, , 94 

FOLLETT, MARY PARKER _ _ ..: 85-86 

FORD, HENRY . . . 10 

FORD MOTOR CO 1 24,85 

FORTUNE POLL OF BUSINESS OPimON 120-122 

FRIEDRICH, CARL J 31,32,64,97 

GALBRAITH, J. K 14 (note), 15,18 (note), 19 (note), 127 

GASKILL, N. B . 119 (note) 

GENERAIj motors . 10, 25-26, 116 

GETTY, J.'P 20-21 

GORDON, LINCOLN .. 101 (note) 

GORDON, ROBERT A . 11-13 

GOVERNMENT AND BUSINESS: Administrative comparisons of. 
(See Business and government, administrative comparisons of.) 

GRAICUNAS, V. A 42 (note) 

GRAUSTEIN, ARCHIBALD R vii 

GREER, HOWARD C . 129 (note) 

GULICK, LUTHER 34 (note), 42 (note), 96 (note) 

HABIT IN ADMINISTRATION 62-63 

HAMILTON, WALTON 119 (note) 

HART, SCHAFFNER& MARX... 97 (note) 

HENDERSON, L. J 96 (note) 

HIERARCHY COMPLEX: makes communication and integration difficult. 42-43 



J40 INDEX 

Page 

HOLMES, JUSTICE OLIVER WENDELL 45 

HOPF, HARRY A 45 (note) 

HOPPOCK, ROBERT 94 (note) 

INCENTIVES IN ADMINISTRATION 3, 54flF, 63-65, 71-72, 76flf 81, 102 

{See also Personnel; Leadership; Morale.) 

INCOME LEVELS 116-117 

INCORPORATION, FEDERAL: As a method of securing and enforcing 

trusteeship 130, 134-135 

INDIVIDUAL VERSUS PUBLIC INTERESTS 120 

INDUSTRIAL COMPARED WITH AGRICULTURAL EMPLOY- 
MENT - 4 

INSULL INTERESTS 19 (note), 115 

INTEGRATION, ADMINISTRATIVE: Difficulty of, a cause of bureauc- 
racy 1- 42-43 

INTERNATIONAL BUSINESS MACHINES 90 

INVESTORS: Responsibility of managers to 113-116 

{See also Control of corporations.) 

JAMES, WILLIAM 92 

JOSLYN, C. S 85 (note) 

KEEZER, DEXTER M 119 (note) 

KNUDSEN, WILLIAM S 25 

KREPS, THEODORE J vii 

KRUEGER, L. M . 44 (note), 85 (note) 

KUHN, LOEB CORPORATE GROUP 8 

LABOR: 

Desires of 94-98, 102 

Responsilpility of management to ■- 116-117 

Turn-over. {See Turn-over, labor.) 

Unions 116 

LA FOLLETTE COMMITTEE. 9 (note) 

LEADERSHIP: 

Age as a factor in . 45-49 

Age of top industrial executives ^ 45-47, 49 

Age of top Federal executives 47-49 

And decentralization 82-83 

Broadness of outlook as a factor in 49-50 

Desire for power ^ :. 64-65 

Factors necessary to attract executive talent 53-54 

Importance of 45, 85-86 

Incentives in development of . 90-93 

Ineffective, a cause of bureaucracy 44-54 

Made difficult by size. 3 

Necessary component of successful enterprise 72 

Recruitment and development of leaders 46, 48-52, 85-93, 100-103 

Remuneration for 90-92 

Specialization as a limit to aU-around effectiveness . 50 

Tenure as a factor in , 52-53 

Traits of 44-45 

LEE. JOHN :. 39,43 

LEVEN, MAURICE 110 (note) 

LEVER BROS 90 

LIPPINCOTT, BENJAMIN E 107 (note) 

LYON, L. S 119 (note) 120 (note) 

McCAMY, JAMES L .. 100 (note) 

McCORMICK, CHARLES P . 90 (note) 

McDIARMID, JOHN 101 (note) 

MACHIAVELLI.. 63 

MACHINE TECHNOLOGY: Relation of, to corporate finance 3 

McKESSON & ROBBINS . 115, 129 (note) 

McKINSEY, JAMES O 22, 50 (note), 62, 63, 83, 120, 124 

MACMAHON, ARTHUR W 49 (note), 51 (note) 

MANAGEMENT: 

Control of corporations by 3, 14flf, 20-27 

Stockholdings of 12-13 

{See also Administrative control; Coordination; Leadership; Organiza- 
tion; Policy; Trusteeship.) 



INDEX 141 

Page 

MASON, EDWARD S vn 

MASON, LOWELL B 119 (note) 

MAY, STACY 119 (note) 

MAYO, ELTON 96 (note) 

MEANS, GARDINER C 4 (note), 

11 (note), 14r-16, 21 (note), 22, 24, 64, 107, 108 (-lote) 

MELLON CORPORATE GROUP-.-.. 8-9 

MERIAM, LEWIS . 47 

METCALF, H. C -. 85 (note) 

MILLETT, J. D 49 (note), 51 (note) 

MISSION CORPORATION 20-21 

MONTGOMERY WARD 85 

MOONEY, JAMES D 31 (note), 82 

MORALE: 

And decentralization - 82 

And discrimination . i--_ 55, 58 

And hours of work . 54, 58 

And promotion . 515, 58 59 

And psychological identification of worker with enterprise ,_ 55, 58 

And security ^- 4_55, 58 

And the wage level ^. 54, 58 

And working conditions *- 55, 58 

Attainment of 93-98J 100, 102 

In bureaucracies p- 34 

Indicated by turn-over rate i-- 56-62 

Low level of, a cause of bureaucracy ;.. 54-62' 

Xecessarv factors of i.- 54flf 

MORGAN-FiRST NATIONAL CORPORATE GROUP . 8 

MOSES + .- 82 

MUNGER, ROYAL ' 21 

MUNSON, EDWARD L . 93 (note) 

MURRAY, PHILLIP . 97 (note) 

MUSICA, PHILIP. (See Coster, F. D.) 

NATIONAL LABOR RELATIONS ACT . .... 116 

NATIONAL RETAIL TRADES ASSOCIATION. ' .. 9 

NOURSE, EDWIN G 110 (note) 

OBJECTIVES: Definition of, as a correcti-'-e for bureaucracy 71-72, 99, 101 

O'BRIEN, TERENCE 101 (note) 

O'CONNOR, JOHNSON 85 (note) 

O'MAHONEY, JOSEPH . , iii, vii 

ORGANIZATION IN ADMINISTRATION: 

Channels of coordination and control 77-80, 102 

Complex hierarchy related io poor communication and integration. - 42—43. 

Decentralization.... 82-83, 99, 102 

Departmentation 31-32 

Essential to bureaucratic structure ^ 31-32 

Functional foremen 37-38 

Hierarchy • 31 

Inadequate definition of authority and responsibility as a cause of 

bureaucracy 41-42 

Made difficult by size 3-4 

Span of control 42, 82, 101-102 

Structural causes of bureaucracy 36-43 

Structural correctives for bureaucracy 71-83 

OWNERSHIP: 

Diffusion of _• 3, 10-18 

Causes of.. 10" 

Number of stockholders 10-11 

Results of 14ff 

Size of stockholdings 11-12 

Separation from control _ 3, 19-27 

PATTERSON, RICHARD C _..• 124 

PERSON, H. S ; 38 (note), 40-41 

PERSONNEL: 

Adequate wages and morale . 95-97,102 

Attainment of high morale . 93-98, 100, 102 



142 INDEX 

PERSONNEL— Continued. Page 

Causes of bureaucracy ^ 44-67 

Summary J 67 

Development of leaders 88-93, 103 

Discrimination and nondiscrimination 55, 58, 96, 102 

Habit and inertia 62-63 

Incentives - 54flF, 63-65, 71-72, 76fF, 81, 102 

Morale. (See Morale.) 

Professionalization of, a characteristic of bureaucracy 3 1-32 

Promotion -- 86-90,95^96,98 

Psychological identification of workers with an enterprise. 55, 58, 96-98, 102 

Recognition of workers 94, 96-98, 102 

Recruitment of leaders-. .._ . - 86-89,100,103 

Security as a desire of lab ir. 95-96, 102 

Security in small and larg j corporations — ' 55 

Stability of wages compared to executive compensation. 111-112 

Wage levels in small and large corporations 54 

Working conditions in small and large corporations 55 

PIGORS, PAUL 85 (note) 

POLICY DETERMINATION IN ADMINISTRATION: 

Clear objectives«and methods as aids to correcting bureaucracy 71, 

72, 99, 101 

Location of control over 21-27 

POLICY FORMATION AND EXECUTION IN ADMINISTRATION. 26 
POLICY. (See also Leadership; Management.) 

POOLE, F. P - 91 (note) 

POUND, ARTHUR 10 (note) 

POWER, DESIRE FOR: A cause of bureaucracy 64-65 

PRESIDENT'S COMMITTEE ON ADMINISTRATIVE MANAGE- 
MENT 99 (note) 

PREVENTIVE MAINTENANCE APPLIED TO ADMINISTRATION. 73, 

74, 99, 101-102 
PRICE CHANGES: 

As evidence of administrative control 14flf 

Frequency related to magnitude 16 

Related to production 14, 16-18, 119-120 

PRICE CONTROL: Administrative versus market 14flF, 108 

PRICE RAISING AND FIXING •_... 14, 119-120 

PRICES, IDEAL LEVEL OF 118 

PRODUCTION: Related to price 16-18 

PROFITS AS A MEASURE OF EFFICIENCY 76-77 

PUBLIC RELATIONS: Emphasis upon, as a corrective for bureaucracy. 83, 

84, 100, 102 

PUBLIC VERSUS INDIVIDUAL INTERESTS . 120 

PUBLICITY AS A METHOD FOR SECURING AND ENFORCING 

TRUSTEESHIP . 127-129,133-135 

REILEY, ALAN C ... 31 (note), 82 

REPLACEMENT RATE. (See Turnover, labor.) 

RESPONSIBILITY: Clear definition of, as a corrective for bureaucracy. 72, 

73 99 101 

REYNOLDS, LLOYD G . '...'. ' vii 

ROBINSON, E. A. G ..... 24 (note), 42 . 

ROBINSON, JOAN i 14 (note) 

ROBINSON, WEBSTER . .. 71 (note) 

ROCKEFELLER CORPORATE GROUP . 8-9 

ROCKEFELLER FOUNDATION vii, ix 

ROCKEFELLER, JOHN D., Jr . 20 

ROOSEVELT, FRANKLIN D 48 (note) 

RORTY, MALCOM C ., .. 88 (note), 90 (note) 

RULES IN ADMINISTRATION: 

A cause of bureaucracy J ^ 33, 38-40 

Made necessary by size 3 

Uses of 38f, 74-75 

SALARY. (See Executive compensation.) 

SCHELL. E. H.. 125 (note), 126 (note) 

SCHMECKEBIER, L. F._. .• 47 (note) 

SEARS, ROEBUCK . _. 86 

SECURITIES AND EXCHANGE ACT . 108 (note) 



INDEX 143 

Page 

SEPARATION OF OWNERSHIP AND CONTROL 3, 19-27 

SHARP, WALTER. .\'. 53 

SLOAN, ALFRED P 25 

SMITH, ADAM . , 64 

SMITH, H. L .... 44 (note), 85 (note) 

SOCIAL SECURITY ACT ■ ... 116 

SPAN OF CONTROL IN ADMINISTRATION . 42, 82, 101-102 

SPECIALIZATION, FUNCTIONAL: A contributing cause of bureauc- 
racy 42 

STAFF MEN AND PREVENTIVE MAINTENANCE IN ADMIN- 
ISTRATION 73-74, 102 

STANDARD PRACTICES AND THEIR PROPER PLACE... 74-75,99, 102 

STEINER, W. H 108 (note) 

STETTINIUS, EDWARD R., Jr 32 (note), 51 (note), 86-87 

STEWART, COLONEL 20 

TAFT, WILLIAM HOWARD 53 

TAUSSIG, F. W 85 (note) 

TAYLOR, FREDERICK , 37-38 

TEAD, ORDWAY 44,72 (note), 85-86, 98 

THORP, WILLARD 4 (note) 

THURSTON, JOHN .'... 101 (note) 

TIDE WATER ASSOCIATED OIL CO 20-21 

TRUSTEESHIP OF MANAGEMENT: 

Evidence of awareness of ^ 108flF 

Business opinion on social legislation 120-122 

Emphasized by diffusion of ownership , 22 

Fiduciary relationship of manager to owner 107ff 

General responsibility of managers to be inventive . 109-1 10 

Methods of securing and enforcing . 123-130, 133-135 

Direct responsibility through legislation 129-130, 134-135 

Making boards of directors more effective 124^127, 133-135 

Social expectance of responsible action 123-124, 1 33-134 

Use of publicity 127-129, 133-135 

Related to separation of ownership and control 3,27 

Requirements of 107-122 

Relation of business to government 120 

Responsibility to consumers 118-120 

Responsibility to investors 113-116 

'Responsibility to labor 116-117 

Responsibility to managers themselves 110-113 

Summary of elements and correctives 131-135 

TURNOVER, LABOR: 

In large and small corporations 56-58 

Replacement rate as best measure of .. 56 

TWENTIETH CENTURY FUND 4 (note), 7 (note), 111,114 

UNITED STATES CIVIL SERVICE COMMISSION 61 fnote) 

UNITED STATES DEPARTMENT OF AGRICULTURE 129,134-135 

UNITED STATES DEPARTMENT OF COMMERCE 4 (note) 

103, 132, 134 

National Bureau of (Standards 128-129, 134-135 

UNITED STATES DEPARTMENT OF LABOR vii 

Bureau of Labor Statistics 54 (note), 57 (note), 58 (note) 

UNITED STATES FEDERAL TRADE COMMISSION 10 (note), 

19 (note), 119, 130 (note) 
UNITED STATES NATIONAL RECOVERY ADMINISTRATION: 

Price fixing under 119-120 

UNITED STATES NATIONAL RESOURCES COMMITTEE.. 4-18 (notes) 

24 (note), face 116 (note), 117 (note) 
UNITED STATES SECURITIES AND EXCHANGE COMMIS- 
SION 8 (note), 11, 21 (note), 113 (note), 115 (note), 125 

UNITED STATES TEMPORARY NATIONAL ECONOMIC COM- 
MITTEE III, VII, IX, 4, 54 (note), 103, 107, 119, 122, 125-126, 132-135 

UNITED STATES CHAMBER OF COMMERCE 9 

UNITED STATES STEEL 116 

UNITS OF MEASUREMENT IN ADMINISTRATION 76,99-100,102 

UNIVERSITY OF CHICAGO, PUBLIC ADMINISTRATION FUND, vii, ix 



144 INDEX 

Page 
URWICK L 34 (note), 42 (note), 82-83, 96 (noteO 

WAGES AND HOURS ACT HO 

■WTATT PORTTPT T _ - y4, y< ^^Llu^Jc; 

WHITEHEAD, T. N:.::::::::::::'-'-'-'-'----- — 55-56, 85 (note), 95, 96 (note) 

WHITNEY, RICHARD ^^J 

WILLARD, DANIEL io rnnttt 

WILLIAMS, JOHN H ^^ ^ i no 

YOUNG, OWEN D ^"^ 

o 



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