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.
Fundamentally exploitation, even though it may take a form which is to some extent sanctioned by common usage, is a dishonest process. Men who are thoroughly fair and honorable in all their dealings will not be misled into taking action that looks toward depriving some of their business associates of property or benefits to which they are in equity entitled. Men of high standards of personal conduct will not descend to using positions of honor and trust for the advancement of their personal fortunes at the expense of those in whose behalf they are supposed to act. Especially is this true in the large corporations with their thousands or tens of thousands of stockholders who are attracted largely by the reputations of the management and of individual directors. Out of the 26,544 shareholders in the New Haven on January 1, 1915, 10,813 were women, 3,522 were trustees or guardians, and 887 were insurance companies or other corporations. The directors of this company could well feel that they were in a position of immense responsibility in handling the funds of so many thousands of dependents.
The obvious remedy against exploitation, it may therefore be suggested, would be for those shareholders who desire honest management to elect only directors of unimpeachable honor or to refuse to buy the securities of corporations which do not have such directors. As a matter of fact, this is the fundamental remedy and it is gradually being applied. But human nature is too slowly changed to make this remedy effective except over a period of generations. It is quite possible that in time, as corporate methods become better understood and standards become better established, attempts at exploitation will become comparatively rare.
These last remarks lead us back to the difficulties discussed in the preceding chapter of determining when and to what extent a director is morally justified in taking advantage of his position to make profits for himself. Certainly a director who realizes that his company is doing well and has good prospects is not to be blamed for going into the open market and purchasing more of its shares. In so doing he merely shows a proper confidence in the future of his company. On the other hand, when his business judgment tells him that dark days are ahead, is there any reason why he should not sell his shares to others whose opinion differ from his own? The distinction between what is proper and what is improper is perhaps to be found in the principle that the director may buy or sell as he chooses, so long as he is not basing his action on information that ought properly to be made public. The application of that principle is naturally left with each man's conscience.