SECOND READING. (Hansard, 29 April 1868)

§ SIR WILLIAM HUTT
, in rising to move that the Bill be now read the second time, said, he thought it unnecessary to make reference to statistics for the purpose of showing that, in the last few years, the affairs of many railway and joint-stock companies had been in a disastrous position—disastrous not only to the shareholders themselves, but to the country and the general interests of the public. That calamitous state of things had directly resulted from the system of management under which the companies were formed?—a system which was vicious in itself and in many cases most disgracefully carried out. It was therefore, he thought, absolutely necessary that Parliament should interpose to prevent, if possible, the recurrences 1536 of such evils. The case was one of great urgency. The amount of capital either compromised or lost by the collapse of the companies' system of management was perfectly gigantic. He believed it exceeded the measure of the great monumental debt of this country, and was the largest expression of figures which perhaps the human mind could comprehend. Parliament had of late been much condemned for having abandoned this vast amount of property to the will and pleasure of private individuals, and for having taken no care of the interests of the shareholders. That, however, he thought was not a just statement of the case; for, up to almost the present moment, neither the shareholders nor a large proportion of the public seemed to desire that protection. Since 1845, all the measures on the subject submitted to the House, either by private individuals or by the companies themselves, seemed to have called forth a feeling that any interference on the part of that House with the management of the affairs of such companies would be considered an affront and an injury to the shareholders themselves. He remembered Mr. Hudson, who for some years acted as spokesman in that House for many of those railway companies, declaring that such attempts at legislation were unconstitutional, and that it was the right of Englishmen to manage their own affairs and in their own manner. In consequence of that feeling and such remonstrances, those companies had been left pretty free from any legislative restraint up to a recent period. In the Railway Clauses Consolidation Act of 1845, and in the Companies Act of 1862, as well as in the Railway Acts Bill of last Session, there were clauses inserted for regulating the management of the financial affairs of the companies; and if the provisions of those Acts had been fully carried out they would have been spared many of the calamities which they had had since to deplore. Those provisions were illusory, and were never enforced, because they took the form of mere mandatory directions, which were generally treated with either neglect or defiance. Parliament should never speak, but to command, and should never command unless it was able to enforce its behests. A very great change had, however, recently come over the public mind, including directors and shareholders. They were now sadder but wiser men; and legislation on the subject was now universally called for. The only 1537 question therefore was, what arrangements should be adopted by which malversation in those matters could be for the future prevented; and what should be done to restore to those important companies that confidence under the loss of which they were at present suffering? A Mr. Wrigley, at a recent meeting at Manchester, had proposed a plan by which the directors would be divided into two bodies—one to have the exclusive charge of the capital of the company; the other to be exclusively occupied with the management of the working of the line. But he thought no cutting and shuffling of the pack would alter the tint of the cards. He did not believe that any such plan would be effectual in preventing the directors and some of the shareholders combining together for the purpose of paying dividends to themselves and endeavouring to raise the market value of their property, by representations neither sanctioned by upright dealing nor by correct bookkeeping. It was not his intention to adopt any such plan, nor to advocate another one, which had been put forward also by a high authority—he did not advocate a system of Government audit, as that expression was generally understood. If the guarantee of the State were to be given to all such accounts presented to the Board of Trade, the various other companies engaged in mercantile and industrial pursuits would make similar claims upon the Government; and the consequence would be that the Board of Trade would find itself involved in vast, complicated, and overpowering interests. More than that, he thought it impossible that Government auditors could certify to the correctness of the accounts laid before them without communicating to them the sanction of Government authority, and he was afraid that the effect of such a plan would be to get rid of that individual responsibility which, in matters of this kind, was of much importance. The plan he ventured to propose by the present Bill was one which had been adopted by the Government itself in a measure now before the other branch of the Legislature. His object was to effectually carry out the provisions of the Clauses Consolidation Act of 1845, and the Companies Act of 1862, so far as they related to the regulation and exhibition of the accounts. He proposed that the chairman and two directors of each company, together with the accountant, should, upon the occasion of the company's meetings, draw up and sign a 1538 full and faithful balance sheet of the assets and liabilities of the company, and that such balance sheet, together with the accounts from which it was deduced, should be filed with the Board of Trade, and with the Registrar of Public Companies; and, in order to render those accounts intelligible, he proposed that, with the accounts, there should be drawn up and filed the report of the engineers of each company as to the condition of the permanent way and the rolling stock of the company. In order to prevent any manipulation or cooking of the accounts, he proposed that they should all be made out according to a particular form prescribed by the Board of Trade. No dividend would be payable until all these requirements were fulfilled. In addition, he proposed to enact that all the officers of the company, signing documents of a deceptive or a fraudulent character, should be liable to fine and imprisonment. Two important objects would be gained by making it compulsory on companies to make out their accounts in a prescribed form. In the first place, there would be no dressing them up in order to make things pleasant, or to suit the interests of the company itself; and, in the next place, there would be no payment out of borrowed money, and no money could be paid without passing through the books of the company. In addition to this, by compelling all companies to adopt the same form of accounts, the public and the shareholders would derive great advantage from being able to form some estimate of the respective value of the shares of the companies. He had now stated the leading features of his Bill which he had taken up at the request of others, and which, if adopted, he believed would go far to prevent a recurrence of those evils under which several companies, as well as the public generally, were suffering, and which had produced so great a depression. He might be wrong in his views, but he had taken every pains by study and inquiry to form a right conclusion upon the subject. He had been desirous to see this measure brought forward with the sanction and authority of the Government; but as his hon. Friend the Vice President of the Board of Trade had declined to take the conduct of the measure, he felt it his duty to assume the responsibility of submitting it himself to the House. He trusted the House would feel that he had a claim on its support.

§ MR. STEPHEN CAVE
said, he would offer no objection to the second reading of the Bill, the principle of which was similar to that of the measure introduced into the House last year. The position this year was, however, somewhat different. The Government had, already introduced a Bill into the other House of Parliament for the regulation of railways, and in that Bill they had largely availed themselves of the provisions of his right hon. Friend's measure. There were, however, a few salient points upon which the Government had taken a view different from that of the right hon. Gentleman. One point was, the Government had confined themselves to railway companies exclusively. He thought that in any tentative measure of that kind, it would be wise for the House to try the experiment upon a certain number of companies before embarking in the serious operation of legislating for all the limited companies in the country. There was a difference in principle between railway companies and ordinary limited companies. Very few of the latter had compulsory powers granted them by Parliament — a characteristic which alone would warrant Parliamentary interference in the internal concerns of railway companies. There were many thousands of limited companies in the country, and the form of accounts suitable to one description of company would be quite unsuitable to another, so that it would be next to impossible to prescribe a form that would apply to all. And a variety of other considerations showed how necessary it would be to limit the operation of a Bill like that before the House, at least for the present, and until opinion had been tested by experience. In the Act of 1862 there was a particular form recommended to joint-stock companies. By that Act it was provided that upon a requisition signed by two-fifths of the shareholders of any joint-stock company, an application might be made for a Government inspection of the accounts of the company. But that power had only in one instance been taken advantage of, and in that instance the time for an inspection was past, for the company was being wound up in Chancery. This showed how difficult it was to move shareholders to take advantage of arrangements 1540 which the Legislature provided for their protection. It seemed to him that the only perfect measure of the kind which it was possible to bring forward would be one rendering Government audit of railway accounts compulsory; but he had last year stated, in reference to his right hon. Friend's Bill, several objections to such a course. He believed it would paralyze the watchfulness of the individual shareholder, and thus be fatal to the prosperity of joint-stock undertakings; the business of the Legislature was to give every facility to shareholders for protecting themselves, and not to bring about a state of things in which shareholders whenever they met with difficulty would go citing to the Government for assistance. It had been stated over and over again that it was quite impossible to control directors by Acts of Parliament; that, if they were determined to cook the accounts, as it was called, they would do so. And even painful cases of fraud had at times been disclosed, the recurrence of which no foresight on the part of the Legislature could make impossible. But whose fault was that? The Courts of the country were open for the prosecution of persons who were guilty of such crimes. The shareholders individually were to blame in not choosing competent and trustworthy men. Persons were selected for the office of director too carelessly, and, in many cases, on account of their social standing and other circumstances, which in no way necessarily qualified them for their office. Gentlemen were constantly elected to the office of director simply because they were Members of Parliament, and supposed rightly or wrongly to have certain influence, which might on occasion be valuable; and in many respects shareholders permitted their affairs to be managed in a way which would bring a private concern to the verge of bankruptcy in a very short time. Shareholders then would act wisely if they asked the Legislature for no more than perfect freedom of action and perfect publicity with regard to the affairs of the company. Let the accounts be kept in an intelligible way, and the shareholders be afforded every facility for sifting them to the bottom. No form of account was prescribed by the Bill of his right hon. Friend; power only was given to the Board of Trade to prescribe a form. The Government had in the Schedule of their Bill set forth a very carefully prepared form, which might be 1541 modified with the consent of a company, to suit particular cases. This he believed, was more agreeable to the wishes of the railway companies. It was, he believed, sufficiently elastic to meet the varying circumstances of the different railways; and, at the same time, sufficiently precise to enable any shareholder of ordinary intelligence to compare one year's accounts with another year's, and those of one company with those of another. This would prove of the greatest advantage. He should be very loth to allow auditors to interfere with the policy of a company, on which the success of au undertaking really depended. That was a matter purely for the shareholders, who had every facility for controlling it under measures recently passed. The right hon. Member wished the reports of companies to be sent to the Board of Trade; but he did not tell them what the Board of Trade was to do with them. The probability was that those reports would be put into pigeon holes and there they would remain, unless some shareholder should apply to inspect them, which would rarely happen. The Government, on the contrary, thought it would be better to require a printed copy of the report to be furnished to each shareholder on his application, and that he should have the power of inspecting the books of the company at its office. The Bill of last year provided that the accounts should be certified by the auditor, and that unless he did so the dividend could not be paid. He (Mr. Cave) did not, however, agree that the auditor should declare the dividend, that being more or less a matter of policy, and not to be decided merely upon the state of the half-year's accounts. On this point as well as upon some other matters of detail, the two Bills differed. He thought it would be better to postpone the next stage of the Bill until the Government measure came down from the House of Lords in order that they might be both considered at the same time.

MR. SCOURFIELD
said, he had little confidence in Parliamentary efforts to reform joint-stock company management. Everything that had hitherto been done to provide facilities for the shareholders to detect fraud or irregularity in their companies had been systematically neglected. And this had not arisen so much from want of light or knowledge as from wilful shutting of eyes. The extraordinary fascination of a large rate of interest was stronger than the wisest counsel; and nothing but bitter experience seemed to 1542 teach investors the truth of the Duke of Wellington's maxim, that high interest meant bad security. The shareholders might be taken to the salutary springs of economy, but it would be impossible to make them drink. He remembered a paragraph in the money article of The Times in 1863 which, quoting from memory, he believed ran in this way— Another ruinous financial collapse is due in the year '67, and we have every reason to believe the preliminaries are already adjusted. This prophecy was verified; and he believed persons of sound judgment could always predict with tolerable certainty the consequences of reckless investing. The evil has arisen from the wish of investors "to eat their cake and have their cake." By their very nature, railways are monopolies; and the best plan would have been to recognize the fact at the beginning, and treat them accordingly. But this has not been done. Still, he approved the proposal to give every possible publicity to companies' accounts, and would not oppose the Bill.