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.
The English statutes provide for the auditing- of each company's accounts by an independent accountant elected by the shareholders. The auditor is responsible to the shareholders and not to the directors, and he is legally liable to reimburse the company for any loss which he might have prevented. The courts have said that it is the duty of an auditor not to confine himself to verifying the arithmetical accuracy of the balance sheet, but to inquire into its substantial accuracy. The report of the auditor must be sent to the shareholders. The courts have further said that an auditor does not discharge his duty by simply putting the shareholders in the way of obtaining information; he must state his conclusions in unmistakable terms.
The absence of any corresponding machinery in the United States places the shareholder in a peculiarly helpless situation, especially when he suspects impropriety on the part of his directors. On July 2, 1914, W. Bourke Cockran, an eminent New York attorney, representing a stockholder of the International Steam Pump Company, appeared before the Supreme Court of the State of New York in an effort to compel the directors of the company to furnish more complete data than his client had previously been able to secure. "Doesn't the existing law on corporations give you sufficient power to go in and inspect the books?" asked Justice Weeks. "Why, your Honor," replied Mr. Cockran, "they would only laugh at any one who really tried to get at the books. It would take until doomsday".
Under recent decisions the New York courts have made it possible for shareholders to inspect the stock ledger and transfer books of their corporations for the purpose of procuring a list of the stockholders. This right has, beyond question, been abused by various individuals who have made copies of lists of shareholders for the mere purpose of using them as mailing lists for advertising purposes. These lists of shareholders of important corporations have even been advertised for sale. Nevertheless, in spite of this abuse, the right must be maintained and enforced; otherwise a shareholder of a large corporation, even though he might have important information that would affect the votes of his fellow shareholders, would have no economical and effective way of communicating with them.
On the basis of what has just been said as to the rights of shareholders, it is evident that large discretionary powers must be left to the directors. No matter what improvements might be made in the relations of the shareholders to their corporation, they could not themselves undertake the direct management of its affairs. In very small or close corporations it is possible that the individual shareholder may have some personal influence which could be made of value to the corporation, but in large corporations the individual can accomplish little except through his vote or through membership on the board of directors. The Pennsylvania Railroad Company has over 93,000 shareholders, of whom 45,000, or nearly one-half, are women; the women shareholders own over 28%. of the outstanding stock. The American Telephone and Telegraph Company has 62,000 shareholders and the United States Steel Corporation has 110,000.