Forms of Organization and Management

While the form of organization of the Trust may often not have any material effect upon its economic influence, it is still very frequently true that the form is determined to a considerable extent by the legal institutions of the country; and sometimes the form of organization is of significance not merely from the legal point of view, but also from the economic. 

When some years ago the pressure of competition arising from the large amount of capital for investment in this country had tended to lessen the profits of manufactures, the first effort to lessen this competition naturally resulted in agreements upon prices or in agreements among different manufacturers to divide the selling territory among themselves, or in some other similar form of agreement which left to each establishment complete autonomy as regards its own management, but which brought about some form of an alliance to lessen the competition.

Such agreements were usually and more or less accurately called Pools.  This form of agreement (Kartell) is still common in Germany, and is, in fact, the usual from of agreement there where the courts uphold such contracts. In the United States, on the other hand, the courts have very generally held that such agreements were in unreasonable restraint of trade, and in consequence void, as contrary to public policy. The parties to the pools, therefore, knowing that they could not be legally bound, frequently violated the terms of the agreements by increasing their output beyond the amount agreed upon, cutting prices, and by other similar means.

To overcome these difficulties, the form of the Trust was at length invented and put in practice--in the first place by the Standard Oil Company, in 1882. Under this form of organization, the stockholders of each of the separate companies assigned their stock to a few trustees, giving thus an irrevocable power of attorney. In Lieu of the stock assigned, the trustees issued trust certificates to the stockholders of the separate companies, and upon these trust certificates profits were divided. 

All of the earnings from the different members of the company were pooled, and each manufacturer received his due share as evidenced by the certificates regardless of the question whether his establishment were running or closed. The trustees, having in their hands the voting power of all the stockholders, elected whatever persons seemed to them best as officers of the separate companies. In this way the management was absolutely unified and the interests of all parties concerned became one. The courts finally holding that this Trust agreement was illegal, the plan was later adopted of organizing a new company which should buy up all of the separate plants of the different companies entering the combination, so that in this way a unified management was secured within the law.

In order that a more convenient form of handling the properties of the different companies might be secured, and that under certain circumstances somewhat greater flexibility of management could be attained, a third form of organization was later adopted which was in many respects quite like that of the earlier Trusts. In this form a new company is organized as a stock-holding company. This company then buys up all or a large proportion of the stocks of each of the companies coming into the organization, and holds these stocks. The officers of the central organization are thus in a position, by voting the stocks of the different companies, to elect the directors and officers of those companies and thus control their policy.