The management in the Lehigh Valley case, and in many other similar cases, took the attitude that they were the ones best acquainted with the needs of the corporation and were better entitled than were the stockholders to judge as to the necessity for betterment expenditures. They believed, further, that stockholders, if the decision were left to them, would not have sufficient patience or be sufficiently interested in the development of the corporation to be willing to have large sums set aside out of each year's earnings in order to build up the capital assets. It might have been possible, to be sure, to finance the required betterments by fresh issues of obligations and of stock, but the management believed that in view of the past financial record of the company, this could not be economically accomplished. They took, therefore, the course which seemed to them proper, of concealing - or partially concealing - the expenditures for betterments, and thus improved the property of the corporation without the knowledge or consent of the stockholders.

The motives of the management in this case were unimpeachable, and there can be no doubt, as we look back, but that the Lehigh Valley and its stockholders as a body have been greatly benefited by the policy that was followed. And yet this conclusion may not dispose of the whole question.

The stockholders of most large corporations at the present time can scarcely be regarded as a permanent body of individuals. Shares are constantly being shifted back and forth in the stock market; many shareholders do not regard their1 holdings as permanent assets, but rather as temporary investments which they intend to sell whenever they may need money. Naturally, each set of stockholders desires to secure as large returns as possible, and emphatically does not desire to have earnings secretly' withheld in order that future stockholders may reap the benefit. Their first interest, usually, is not in the corporation, but in themselves. And we must face the situation that actually exists in many large corporations in which the interests of the stockholders and the interests of the corporation are not quite identical. Under these conditions, which set of interests shall the directors elect to serve? Withers quotes, with full approval, the opinion which is forcibly, though dogmatically, expressed by Pixley, as follows:*

It is not incumbent upon the directors to consider in any way individual shareholders, or a special group of shareholders, and certainly not those who make a practice of buying and selling shares and holding them for short periods. It is their duty to keep the capital of their company intact, and to do their best to make it a permanent institution.

Equally forceful and dogmatic opinions are often expressed by shareholders on the other side.

Perhaps the most practical conclusion that can be reached is that the directors should consult both sets of interests and, when necessary, should compromise. Certainly they should protect and keep intact the property of the corporation. But in so doing they should endeavor to avoid injurious concealment of facts or injustice to one set of shareholders as compared with the succeeding set. In case the corporation openly withholds dividends and piles up a surplus, shareholders know what is being done and the market prices of their holdings respond to the true status of the company's assets. This was demonstrated over a period of several years by the Reading Railroad Company, the shares of which were paying 4%, yet for years were sold at between 120 and 150. The question is not whether the accumulation of a surplus out of earnings is advisable, but whether concealment of the accumulating surplus is advisable. Without failing to recognize the force of the argument that can be advanced in favor of concealment, it would seem that the reply to this last question should, on the whole, be negative.

* Pixley's "Auditors: Their Duties and Responsibilities," quoted in Hartley Withers' "Stocks and Shares," p. 156.

In those not infrequent cases where directors are with reason suspected of deliberately withholding and concealing earnings and piling up a secret surplus in order that they may, as individuals, profit at the expense of their fellow shareholders, there is, of course, no room for differences of opinion. This last case is simply one of exploitation.