Essays: Scientific, Political, & Speculative; Vol. 3 of 3 / Library Edition (1891), Containing Seven Essays not before Republished, and Various other Additions.

by Herbert Spencer

Turn we now to contractors. Railway-enterprise has given to this class of men a gigantic development; not only in respect of numbers, but in respect of the vast wealth to which some of them have acquired. Originally, half a dozen miles of earthwork, fencing, and bridges, was as much as any single contractor undertook. Of late years, however it has become common for one man to engage to construct an entire railway; and deliver it to the company in a fit condition for opening. Great capital is required for this. Great profits are made by it. And the fortunes accumulated in course of time have been such, that sundry contractors are named as being each able to make a railway at his own {73} cost. But they are as insatiable as millionaires in general; and so long as they continue in business at all, are, in some sort, forced to provide new undertakings to keep their plant employed. As may be imagined, enormous stocks of working appliances are needed: many hundreds of earth-waggons and of horses; many miles of temporary rails and sleepers; some dozen locomotive engines, and several fixed ones; innumerable tools; besides vast stores of timber, bricks, stone, rails, and other constituents of permanent works, that have been bought on speculation. To keep the capital thus invested, and also a large staff of employés, standing idle, entails loss, partly negative, partly positive. The great contractor, therefore, is both under a strong stimulus to get fresh work, and enabled by his wealth to do this. Hence the not unfrequent inversion of the old arrangement under which companies and engineers employed contractors, into an arrangement under which contractors employ engineers and form companies. Many recent undertakings have been thus set on foot. The most gigantic project which private enterprise has yet dared, originated with a distinguished contracting firm. In some cases this mode of procedure may, perhaps, be advantageous; but in far more numerous cases its results are disastrous. Interested in promoting railway extensions, even in a greater degree than engineers and lawyers, contractors habitually co-operate with these, either as agents or as coadjutors. Lines are fostered into being, which it is known from the beginning, will not pay. Of late, it has become common for landowners, merchants, and others personally interested, who, under the belief that their indirect gains will compensate for their meagre dividends, have themselves raised part of the capital for a local railway, but cannot raise the rest—it has become common for such to make an agreement with a wealthy contractor to construct the line, taking in part payment a portion of the shares, amounting to perhaps a third of the whole, and to charge for his work according to {74} a schedule of prices to be thereafter settled between himself and the engineer. By this last clause the contractor renders himself secure. It would never answer his purpose to take part payment in shares likely to return some £2 per cent., unless he compensated himself by unusually high profits; and this subsequent settlement of prices with one whose interests, like his own, are wrapped up in the prosecution of the undertaking, ensures him high profits. Meanwhile, it is noised abroad that all the capital has been subscribed and the line contracted for; these facts unduly raise the public estimate of the scheme; the shares are quoted at much above their true worth; unwary persons buy; the contractor from time to time parts with his moiety at fair prices; and the new shareholders ultimately find themselves part owners of a railway which, unprofitable as it originally promised to be, had been made yet more unprofitable by expensiveness of construction. Nor are these the only cases in which contractors gain after this fashion. They do the like with lines of their own projecting. To obtain Acts for these, they sign the sub­scrip­tion-con­tracts for large amounts; knowing that in the way above described, they can always make it answer to do this. So general had the practice latterly become, as to attract the attention of committees. As was remarked by a personage noted for his complicity in these transactions—“Committees are getting too knowing; they won’t stand that dodge now.” Nevertheless, the thing is still done under a disguised form. Though contractors no longer enter their own names on subscription lists for thousands of shares; yet they effect the same end by making nominal holders of their foremen and others: themselves being the real ones.

Of directorial misdoings some samples have already been given; and more might be added. Besides those arising from directly personal aims, there are sundry others. One of these is the increasing community between railway {75} boards and the House of Commons. There are eighty-one directors sitting in Parliament; and though some of these take little part in the affairs of their respective railways, many of them are the most active members of the boards to which they belong. We have but to look back a few years, and mark the unanimity with which companies adopted the policy of getting themselves represented in the Legislature, to see that the furtherance of their respective interests—especially in cases of competition—was the incentive. How well this policy is understood by the initiated, may be judged from the fact, that gentlemen are now in some cases elected on boards, simply because they are members of Parliament. Of course this implies that railway legislation is affected by a complicated play of private influences; and that these influences generally work towards the facilitation of new enterprises, is obvious. It naturally happens that directors having seats in the House of Commons can more or less smooth the way of their annual batch of new bills through committees. It naturally happens that those whose companies are not opposed, exchange good offices. Not only do they aid the passing of schemes in which they are interested, but they are solicited to undertake further schemes by those around them. It is a common-sense conclusion that rep­re­sen­ta­tives of small towns and country districts needing railway accommodation, who are daily thrown in contact with the chairman of a company capable of giving this accommodation, do not neglect the opportunity of furthering their ends. It is a common-sense conclusion that by hospitalities, by favours, by flattery, by the many means used to bias men, they seek to obtain his assistance. And it is an equally common-sense conclusion that in many cases they succeed—that by some complication of persuasions and temptations they swerve him from his calmer judgment; and so introduce into the company he represents, influences at variance with its welfare.

Under some motives however—whether those of direct {76} self-interest, of private favour, or of antagonistic feeling, matters not here—it is certain that directors are constantly committing their constituents to unwise enterprises; and that they frequently employ unjustifiable means for either eluding or overcoming their opposition. Shareholders occasionally find that their directors have given to Parliament, pledges of extension much exceeding any they were authorised to give; and they are then persuaded that they are bound to endorse the promises made for them by their agents. In some cases, among the misleading statements laid before shareholders to obtain their consent to a new project, will be found an abstract of the earnings of a previously-executed branch to which the proposed one bears some analogy. These earnings are shown (not always without “cooking”) to be tolerably good and improving; and it is argued that the new project, having like prospects, offers a fair investment. Meanwhile, it is not stated that the capital for this previously-executed branch was raised on debentures or by guaranteed shares at a higher rate of interest than the dividend pays; it is not stated that as the capital for this further undertaking will be raised on like terms, the annual interest on debt will swallow up more than the annual revenue; and thus unsuspecting shareholders—some unacquainted with the company’s antecedents, some unable to understand its complicated accounts—give their proxies, or raise their hands, for new works which will tell with disastrous effect on their future dividends. In pursuit of their ends, directors will from time to time go directly in the teeth of established regulations. Where it has been made a rule that proxies shall be issued only by order of a meeting of the proprietors, they will yet issue them without any such order, when by so doing they can steal a march on dissentients. If it suits their purpose, they will occasionally bring forward most important measures without due notice. In stating the amount of the company’s stock which has {77} voted with them on a division, they have been known to include thousands of shares on which a small sum only was paid up, counting them as though fully paid up.

To complete the sketch, something must be said on the management of board meetings and meetings of shareholders. For the first—their decisions are affected by various manœuvres. Of course, on fit occasions, there is a whipping-up of those favourable to any project which it is desired to carry. Were this all, there would be little to complain of; but something more than this is done. There are boards in which it is the practice to defeat opposition by stratagem. The extension party having summoned their forces for the occasion, and having entered on the minutes of business a notice worded with the requisite vagueness, shape their proceedings according to the character of the meeting. Should their antagonists muster more strongly than was expected, this vaguely-worded notice serves simply to introduce some general statement or further information concerning the project named in it; and the matter is passed over as though nothing more had been meant. On the contrary, should the proportion of the two sides be more favourable, the notice becomes the basis of a definite motion committing the board to some important act. If due precautions have been taken, the motion is passed; and once passed, those who, if present, would have resisted it, have no remedy; for in railway government there is no “second reading,” much less a third. So determined and so unscrupulous are the efforts sometimes made by the stronger party to overcome and silence their antagonists, that when a contested measure, carried by them at the board, has to go before a general meeting for confirmation, they have been known to pass a resolution that their dissentient colleagues shall not address the proprietary!

That, at half-yearly and special meetings, shareholders should be so readily misled by boards, even after repeated {78} experience of their un­trust­worth­i­ness, seems at first sight difficult to understand. The mystery disappears, however, on inquiry. Very frequently, contested measures are carried against the sense of the meetings before which they are laid, by means of the proxies previously collected by the directors. These proxies are obtained from proprietors scattered everywhere throughout the kingdom, who are mostly weak enough to sign the first document sent to them. Then, of those present when the question is brought to an issue, not many dare attempt a speech. Of those who dare, but few are clear-headed enough to see the full bearings of the measure they are about to vote upon; and such as can see them are often prevented by nervousness from doing justice to the views they hold. Moreover, it must be borne in mind that proprietors displaying antagonism to the board are usually regarded by their brother proprietors with more or less reprobation. Unless the misconduct of the governing body has been very glaring and very recent, there ever arises in the mass a prejudice against all playing the part of an opposition. They are condemned as noisy, and factious, and obstructive; and often only by determined courage avoid being put down. Besides these negative reasons for the general inefficiency of shareholders’ resistance, there are sundry positive ones. As writes to us a Member of Parliament who has been an extensive holder of stock in many companies from the first days of railway enterprise:—“My large and long acquaintance with Railway Companies’ affairs, enables me to say, that a large majority of shareholders trust wholly to their directors, having little or no information, nor caring to have any opinion of their own. . . . . Some others, better informed but timid, are afraid, by opposing the directors, of causing a depreciation of the value of their stock in the market, and are more alarmed at the prospect of this temporary depreciation than at the permanent loss entailed on the company by the useless, and therefore {79} unprofitable, outlay of additional capital. . . . . Others again, believing that the impending permanent evil is inevitable, resolve on the spot to sell out immediately, and to keep up the prices of their shares, also give their support to the directors.” Thus, from lack of organization and efficiency among those who express their opposition, and from the timidity and double-facedness of those who do not, it happens that extremely unwise projects are carried by large majorities. Nor is this all. The tactics of the aggressive party are commonly as skilful as those of their antagonists are bungling. The chairman, who is generally the chief promoter of the contested scheme, has it in his power to favour those who take his own side, and to throw difficulties in the way of opponents; and this he not unfrequently does to a great extent—refusing to hear, putting down on some plea of breach of order, browbeating, even using threats.[5] It generally turns out too, that, whether intentionally or not, some of the most important motions are postponed until nearly the close of the meeting, when the greater part of the shareholders are gone. Large money-votes, extensive powers, unlimited permits to directors to take, in certain matters, “such steps as in their judgment they may deem most expedient,”—these, and the like, are hurried over during the last half-hour, when the tired and impatient remnant will no longer listen to objectors; and when those who have personal ends to serve by outstaying the rest, carry everything their own way. Indeed, in some cases, the arrangements are such as almost ensure the meeting becoming a pro-extension one towards the end. {80} This result is brought about thus:—A certain portion of the general body of proprietors are also proprietors of some subordinate work—some branch line, or canal, or steamboats, which the Company has purchased or leased; and as holders of guaranteed stock, ready to take up further such stock if they can get it, these lean towards projects that are to be executed on the preference-share system. They hold their meeting for the declaration of dividend, &c., as soon as the meeting of the Company at large has been dissolved; and in the same room. Hence it happens that being kept together by the prospect of subsequent business, they gradually, towards the close of the general meeting, come to form the majority of those present; and the few ordinary shareholders who have been patient enough to stay, are outvoted by those having interests distinct from their own and quite at variance with the welfare of the Company.

[5] We may remark in passing, that the practice of making the chairman of the board also chairman of the half-yearly meetings, is a very injudicious one. The directors are the servants of the proprietary; and meet them from time to time to render an account of their stewardship. That the chief of these servants, whose proceedings are about to be examined, should himself act as chief of the jury is absurd. Obviously, the business of each meeting should be conducted by some one independently chosen for the purpose; as the Speaker is chosen by the House of Commons.

And here this allusion to the preference-share system, introduces us to a fact which may fitly close this detail of private interests and questionable practices—a fact serving at once to illustrate the subtlety and concert of railway officialism, and the power it can exert. That this fact may be fully appreciated, it must be premised, that though preference-shares do not usually carry votes, they are sometimes specially endowed with them; and further, that they occasionally remain unpaid up until the expiration of a time after which no further calls can be legally made. In the case in question, a large number of £50 preference-shares had thus long stood with but £5 paid. Promoters of extensions, &c., had here a fine opportunity of getting great power in the Company at small cost; and, as we shall see, they duly availed themselves of it. Already had their party twice tried to thrust the proprietors into a new undertaking of great magnitude. Twice had they entailed on them an expensive and harassing contest. A third time, notwithstanding a professed relinquishment of it, they {81} brought forward substantially the same scheme, and were defeated only by a small majority. The following extracts from the division lists we take from the statement of one of the scrutineers.

	50l. Pre­fer­ence Shares with 5l. paid up.	Ad­di­tion­al Stock or Shares	Re­cor­ded Stock at the Poll as held.	To­tal ac­tu­al Ca­pi­tal paid up.	Num­ber of Votes scored for the Ex­tens­ion.
			£	£
The Company’s so­lic­i­tor	500	7,500l. stock, and 100 50l. shares, with 42l. 10s. paid up.	75,650	18,140	188
Ditto in joint ac­count with another	778	None.
The so­lic­i­tor’s part­ner	60	None.	3,000	300	20
The Com­pany’s en­gi­neer	150	None.	7,500	750	33
The engineer’s part­ner	1,354	4,266l. stock.	71,966	11,036	161
One of the Com­pany’s par­lia­men­tary coun­sel	200	1,000l. stock.	11,000	2,000	40
Another dit­to, dit­to	125	200l. stock.	6,450	825	30
Local so­lic­i­tor for the pro­posed ex­ten­sion	7	None.	350	35	7
The Company’s con­trac­tor for per­ma­nent-way	347	52,833l.	70,183	54,568	158
The Company’s con­vey­an­cer	1,003	333l. stock.	50,483	5,348	118
The Com­pany’s fur­ni­ture prin­ter	35	10,000l. stock.	11,750	10,175	41
The Company’s sur­veyor	360	1,250l. stock.	19,250	3,050	56
The Company’s arch­i­tect	217	14,916l. stock; 119 50l. shares, with 42l. 10s. paid up; and 13 40l. shares, with 34l. paid up.	32,230	20,416	82
One of the Com­pany’s car­riers.	17	833l. stock.	1,683	918	14
The Com­pany’s bank­ers:—
One Partner	.. ..	.. ..	33,666	32,366	90
Another part­ner	.. ..	.. ..	2,500	2,500	18
Ditto in joint account with another	.. ..	.. ..	1,000	850	12

To this list, some seven or eight of the Company’s tradesmen, similarly armed, might be added; raising the number of the almost factitious shares held by functionaries to about 5200, and increasing the votes commanded by them, from its present total of 1068 to upwards of 1100. If now we separate the £380,000, which these gentlemen bring to bear against their brother shareholders, into real and nominal; we find that while not quite £120,000 of it is bonâ fide property invested, the remaining £260,000 is nine {82} parts shadow and one part substance. And thus it results, that by virtue of certain stock actually representing but £26,000, these lawyers, engineers, counsel, conveyancers, contractors, bankers, and others interested in the promotion of new schemes, outweigh more than a quarter of a million of the real capital held by shareholders whom these schemes will injure!

Need we any longer wonder, then, at the persistence of Railway Companies in seemingly reckless competition and ruinous extensions? Is not this obstinate continuance of a policy that has year after year proved disastrous, sufficiently explicable on contemplating the many illegitimate influences at work? Is it not manifest that the small organized party always out-manœuvres the large unorganized one? Consider their respective characters and circumstances. Here are the shareholders diffused throughout the kingdom, in towns and country houses; knowing nothing of each other, and too remote to co-operate were they acquainted. Very few of them see a railway journal; and scarcely any know much of railway politics. Necessarily a fluctuating body, only a small number are familiar with the Company’s history—its acts, engagements, policy, management. A great proportion are incompetent to judge of the matters that come before them, and lack decision to act out such judgments as they may form—executors who do not like to take steps involving much responsibility; trustees fearful of interfering with the property under their care, lest possible loss should entail a lawsuit; widows who have never in their lives acted for themselves in any affair of moment; maiden ladies, alike nervous and innocent of all business knowledge; clergymen whose daily discipline has been little calculated to make them acute men of the world; retired tradesmen whose retail transactions have given them small ability for grasping large considerations; servants possessed of {83} accumulated savings and cramped notions; with sundry others of like helpless characters—all of them rendered more or less conservative by ignorance or timidity, and proportionately inclined to support those in authority. To these should be added the temporary shareholders, who, having bought stock on speculation, and knowing that a revolution in the Company is likely to depress prices for a time, have an interest in supporting the board irrespective of the goodness of its policy. Turn now to those whose efforts are directed to railway expansion. Consider the constant pressure of local populations—of small towns, of rural districts, of landowners: all of them eager for branch accommodation; all of them with great and definite advantages in view; few of them conscious of the loss those advantages may entail on others. Remember the influence of legislators, prompted, some by their constituents, some by personal aims, and encouraged by the belief that additional railway facilities are in every case nationally beneficial; and then infer the extent to which as stated to Mr. Cardwell’s committee, Parliament has “excited and urged forward” Companies into rivalry. Note the temptations under which lawyers are placed—the vast profits accruing to them from every railway contest, whether ending in success or failure; and then imagine the range and subtlety of their extension manœuvring. Conceive the urgency of engineers; to the richer of whom more railway-making means more wealth; to the mass of whom more railway-making means daily bread. Estimate the capitalist-power of contractors; whose unemployed plant brings heavy loss; whose plant when employed brings great gain. Then recollect that to lawyers, engineers, and contractors the getting up and executing of new undertakings is a business—a business to which every energy is directed; in which many years of practice have given great skill; and to the facilitation of which, all means tolerated by men of the world are thought justifiable. {84} Finally, consider that the classes interested in carrying out new schemes, are in constant communication, and have every facility for combined action. A great part of them live in London, and most of these have offices at Westminster—in Great George Street, in Parliament Street, clustering round the Legislature. Not only are they thus concentrated—not only are they throughout the year in frequent business intercourse; but during the session they are daily together, in Palace-Yard Hotels, in the lobbies, in the committee-rooms, in the House of Commons itself. Is it any wonder then, that the wide-spread, ill-informed unorganized body of shareholders, standing severally alone, and each pre-occupied with his private affairs, should be continually out-generalled by the comparatively small but active, skilful, combined body opposed to them, whose very occupation is at stake in gaining the victory?