This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
It has been suggested that one reason for the inefficiency and the light ethical standards of the directorates of some important corporations, is to be found not only in wrong practice in selecting these men, but also in wrong practice in compensating them. In many foreign countries, notably in continental Europe, it is the custom to distribute among the directors at the end of each year, a fixed percentage of the net profits; thus each director, even though he may not be a heavy shareholder, has a direct and personal interest in building up the profits. He is less likely to wink at incompetence or to avoid criticism that would be for the good of the corporation, if he realizes that he must himself pay a portion of the penalty in the form of reduced compensation. Paul Warburg, formerly of the firm of Kuhn, Loeb and Company, has expressed his belief that in this country we should follow the European plan of paying directors in proportion to the dividends they can earn. One important gain in this plan is that it becomes easier to secure as directors men who may themselves have only a small shareholding interest in the corporation; the range of choice is widened. As matters stand now, a man wishes to be a director of an important corporation for either one of two reasons: because he has a large share-interest that he feels he should protect, or because it adds to his prestige. This second motive has a strong influence in making up the directorates of banking institutions. "Membership on the boards of good banks/' someone has said, "is largely a social function." This is not the way to get efficient, hard-working directors. Under our system it is common practice to pay nominal fees for attendance at board meetings, but they seldom amount to more than $20 a meeting, and, therefore, these fees are not a factor of any real weight.
This question of compensation as well as some other questions that' are touched upon in this section, will come up for fuller discussion when we consider the subject of exploitation of corporations. (See Chapters XXIII, XXIV).