Friday, September 18, 2015

Henry Varnum Poor - Early Management Thinker - 1850

Based on the Article
By Alfred D. Chandler, Jr.

Henry Varnum Poor worked as the editor of the American Railroad Journal from 1849 to 1862 and
later published  Poor's Manual of the Railroads of the United States.

As editor, Poor made special studies of construction, finance, operation, and , administration. Of the major problems discussed in the pages of the Journal those raised by the beginning of large-scale private finance, at first fully occupied his attention.  He was the first American to analyze with care and intensiveness many of the basic problems of modern big business.

During the years 1845 to 1849 he had actively helped his brother, John Alfred Poor, build one of New England's most  important railroads, the Atlantic and St. Lawrence, which connected Portland with Montreal. In this work he acquired a valuable first hand understanding of what the construction of a railroad in a semi-frontier area of the United States involved and what specific problems of promotion, organization, construction, and financing had to be met.  He also has intellectual training. Through his brother-in-law, Frederick Henry Hedge, one of the initiators of the Transcendental movement,  Poor came to know
personally Ralph Waldo Emerson, the Channings, Theodore Parker, George Ripley, and other intellectual leaders of the day and became imbued with their buoyant, optimistic belief in man's progress and perfection.
Poor came to  believe that God had given man a mind as the means for his perfection. Man's mind was stronger than the currently existing man-made institutions and could alter the institutions which had brought sin and evil  into the world. The mind must be carefully trained and disciplined both intellectually and morally.

To Henry Poor the coming of the industrial and transportation revolutions was an example where
men by creatively applying their minds to the labor-saving machine were making strides towards the physical perfection that was the first and necessary step to intellectual and spiritual The railroad was having the most profound effect.  By lowering the cost of transportation and by making possible widespread commercial agriculture and large-scale industry, the railroad was making food, clothing, and the other necessities of life plentiful to all classes of For Henry Poor, then, the efficient construction and operation of the American railroad system was even more a moral than an economic necessity, and throughout his life his moral indignation was thoroughly aroused when incompetence or dishonesty hampered effective railroad operation.

When the decade of the fifties opened, the investment market had not yet been standardized. Finance was the major problem of the railroad industry at that time. The new western roads were coming
en masse to the eastern cities to raise money and if the funds were not forthcoming many lines so essential to the growth of the United States could not be built. For this reason Henry Poor, writing from his Wall Street office  tried to popularize  the railroad mortgage bond, the comparatively new financial instrument that was to finance the construction of the roads in the West and the South. He also analyzed conditions of the New York investment market, advising the roads when  to float their securities and explained to them the intricacies of getting  a fair price for western railroad bonds. Poor repeatedly advocated developing systems in  the methods of buying and selling securities. He urged reliable banking firms to enter the railroad security field.

By 1852, however, conditions had changed so rapidly that construction finance was no longer the major problem in the railroad industry and railroads were proliferating.  Poor became cautious and urged the investors not to put their money into roads about which they had little information, and asked the roads not to come to the market  unless the soundness of their financial position was made explicit in
their printed prospectuses. By 1857 there was depression and railroads got into financial problems. Poor
therefore turned his attention from finance and financial reform to the second major problem raised by the expansion of the railroad system at the time that of operation and management.


The Erie Railroad was completed in 1851, the Baltimore and Ohio and the Atlantic and St. Lawrence in 1853, and the Pennsylvania in 1855. The year 1852 saw the entrance of the Michigan Central and the
Michigan Southern into Chicago, and by 1855 the Mississippi had been reached at several places. By that date the Old Northwest which in 1849 had only some 600 miles of road could boast that nearly every sizable town in the area had rail connections with the Atlantic seaboard.

The development and handling of through traffic became an important factor in the survival or success.
One result was the consolidation of smaller lines. The railroad entrepreneurs of the 1850's were now faced with the complex problem of how to operate it most effectively.

The most serious and most novel of the problems of operation were raised by the greatly increased size of the new operating units. By 1855 close to twenty operating units were working more than 250 miles of road.

This development of large individual operating units  presented the American businessmen for the first time with the many modern problems of large-scale business management. Daniel C. McCallum, superintendent of the Erie, pointed out that actually in management methods the smaller roads were closer to the small manufacturing firms of the day than to the new roads of the fifties. A Superintendent of a road fifty miles in length can give its business his personal attention and may be constantly on the line engaged in the direction of its details; each person is personally known to him, and all questions in relation to its business are at once presented and acted upon; and any system however imperfect may under such circumstances prove comparatively successful. In the government of a road five hundred miles in length a very different state exists.

Henry Poor quite agreed with McCallum that system rather than size determined the efficiency of a road, and therefore, its productiveness. His attention had been turned to the problems of large-scale management by the realization that many small roads, old and new, were making better net returns than the large new ones. In railroads, where profits were relatively low, Poor felt that the failure to systematize administration and operations, rather than the roads' traditional excuse of low rates, was most responsible for their unfavorable
financial record. In 1854,  Poor decided to turn the attention of his paper to the study of management.

He wrote "We believe that the science of management is the most important in its bearings upon the success of the American Railroads that it includes facts and principles which are deserving a full statement and an elaborate discussion. . . In this field the Journal will ever strive to be a faithful laborer. To the editor of the Journal the science of management fundamentally resolved itself into three principles organization, communication, and  information. Of these organization was basic."

Organization to Poor meant the careful division of labor, from the president to the common laborer,
with each man having his own specified duties and responsibilities, and each being directly accountable to his immediate superior.  By communication Poor meant primarily a method of reporting throughout the organization which would give the top management an accurate and continuous account of the progress of
operations, and which in so doing would assure the necessary accountability all along the line. Information in an administrative sense was to Poor recorded communications that is, a record of the operational reports systematically compiled and analyzed. This information was to be used for deriving a clearer understanding of such basic matters as fixed costs, running expenses, operational performance, rate-making, and so
forth, and also to provide data necessary for more scientific experimentation to improve service.

He was in touch with various managers of railways in various companies. He was closest to McCallum of the Erie.  "Mr. McCallum's strong point," wrote Poor, "lies in his power to  arrange and systematize, and in his ambitions to perfect his systems. To  this end he has untiringly devoted his energies since he was appointed
in charge of this great work."

McCallum had reorganized the service so as to eliminate much duplication of work and thereby had actually made the road more efficient by cutting down the number of paid hands. Further measures had been
to utilize men fully by making temporarily unoccupied men to clean machinery and make minor repairs
on the rolling stock and equipment. He had systematized the methods of  repairing locomotives so that more than forty engines which were normally lying idle could be on the road. More important was McCallum's
proficiency in adapting the telegraph to railroad operations. Not only did the telegraph make for safer and far more efficient operations but it was also used to facilitate over-all administration. Poor concluded his remarks on McCallum's initial reforms by pointing out that:  Now, the superintendent can tell at any hour of
the day, the precise location of every car and engine on the line of the road and the duty it is performing. Formerly, the utmost confusion prevailed in this regard,  so much so that cars in perfect order
have stood for months upon the switches without being put to the least service, and without its being known where they were.

McCallum's careful "division of  management" was best expressed in an organization chart of the Erie
which he had drawn up for purposes of reference. The design of the chart was a tree with the roots representing the President and the Board of Directors; the branches were the five operating divisions and the
service departments: engine repairs, car, bridge, telegraph, printing, and so on; while the leaves represented the various local agents, subordinate superintendents, train crews, foremen, and so forth. McCallum's
subdivision went even further than indicated on the chart. The smaller units such as the repair and machine shops were "managed with the same careful system that characterized the general superintendence of the
Company's affairs."  Within these subdivisions the duties of each grade in the hierarchy not only were carefully specified, but the grade of each individual in the organization was indicated on the prescribed uniform worn by all employees.

The line of command within the organization followed closely the lines indicated on the organization chart. Orders must go from roots to the leaves via the proper branches. "All subordinates," McCallum insisted,
"shall be accountable to and be directed by their own immediate superior only; an obedience can not be enforced where the foreman in immediate charge is interfered with by a superior officer giving orders directly to his subordinates."  In the same way McCallum pointed out when discussing the powers of the more senior officials, "their subordinates cannot  communicate with higher office, but through them [the senior officials]
and can only be communicated with through them."

Communication from subordinate to superior in  the Erie was achieved by a thoroughgoing system
of reports. "This plan involves on the one hand a very considerable trouble and expense," the Journal
admitted, including "the maintenance of a large office of eight active clerks, but on the other hand it depicts faithfully in the general office every fact of practical importance." This plan included hourly, daily,
and monthly reports. The hourly reports were mainly operational, giving by telegraph a train's location and the reasons for any delays or mishaps.  This "information being entered on a convenient tabular form, showed at a glance, the position and progress of the trains,  in both directions on every Division." It also provided an excellent source of operational information which among other things proved especially useful in deter-
mining and eliminating "causes of delays."

Daily reports, the real basis of the system were required from both conductors and station agents. They covered all important matters of train operations as well as the more general movement of freight and
passenger traffic.  Daily reports were required from the engineers also. These were compiled in a monthly statement giving for each engine the miles run, running expenses, cost of repairs, and work done, and were
submitted as part of the monthly report required of each division superintendent. The superintendent's reports included an account of all operations of the division including cost, expenses, work done for all types of
equipment. Similar monthly reports were required from the heads of all the service departments. The
information thus obtained is embodied in the statistical accounts kept in this office and from it one can  deduce" a mass of information useful in improving the effectiveness of operations.

To Henry Poor the recording and filing of the operational and administrative information in statistical form was as important an aspect of reporting plan as was its provision for communicating the progress of operations to the head office. Poor had long considered operating statistics the basic tool for scientific management, and McCallum's plan appeared to be the most effective one yet devised to acquire such data.

Intelligent action could be taken to reduce expenses and improve performance only when it was known what the expenses of a road were and just how equipment and personnel performed. Comparative studies of the monthly engine reports, for example, clearly showed what engines were best suited to the different tasks, which engineers operated their machines most efficiently, and where changes should be made.

Statistics so necessary in determining running expenses were also essential in ascertaining the specific cost of carrying the different classifications of freight traffic and in fixing a fair rate for each classification. Statistics, Poor insisted, were the only basis on which sound principles  of rate-making could be evolved. Unless rates were thus scientifically determined, unless running and fixed expenses were carefully understood,
no road could be sure just what its net receipts were or how its profits and loss really stood. These determinations, in turn, could not be made until a careful system of organization and communication was devised.

The directors of the railroads always demanded increasing rates to take care of increase in expenses of transportation.  Transportation is  essential to American economic development.  Henry Poor was against it. Instead of increasing the rates Poor urged the American railroad men to apply their minds to reducing expenses so that the apparently low fares could bring a profitable return. He insisted upon an economical administration of the roads. He wrote, "With such an administration we believe the usual rates of charges can be rendered sufficiently remunerative."

In calling on the roads to meet their financial problems by adopting more efficient and economical operating and administrative techniques rather than by raising rates, Poor was the first to voice a demand that
railroad  reformers would take up and carry on for decades to come. In Poor's own day such engineers as Charles Ellet, Jr., John B. Jervis, Daniel C. McCallum, and Zerah Colburn, all made extensive efforts in different fields of railroad operation to carry out principles of a more scientific management.  After
the Civil War their efforts were expanded and refined by the brilliant work of Charles Francis Adams, Albert Fink, and Marshall Kirkman.  Nevertheless, considerations other than improved management in-
fluenced the policies of the financially minded railroad executives of that  day and  too often innovations and improvements in management methods were ignored or laid aside. Thus even as late as 1910 Louis D. Brandeis, supported the views of many of the country's leading engineers (industrial or efficiency engineers) and F.W. Taylor, proponent of scientific management and  insisted that the railroads should meet their financial difficulties by improving their administrative and operational efficiency rather than by raising rates.

If Henry Poor's enunciation of the principles of a more scientific management the principles of systematic organization, communication, and information anticipated and indeed indicated the most constructive
nineteenth-century developments in big business organization, his understanding of the problems involved in putting these principles into practice foreshadowed the twentieth-century pragmatic analysis of big business

He reaised the grave difficulties of adapting human capabilities and current business practices and institutions to the severe requirements demanded by the efficient operation of large-scale administrative units.

Of these difficulties one was the problem of getting railroad employees to accept the strict discipline and rigid regulations that were an essential part of large-scale administration. The employees took no pains to hide their dislike of the new model management and resorted to strikes.The tightening of control was also a primary cause for the founding in 1855 of the National Protective Association of the Locomotive Engineers of the United States. The call for the Association's first regular meeting registered a strong protest against "the blind system requiring implicit obedience" to all rules and regulations and asked: shall we longer submit to the tyrannical will of a few men who strive to aggrandize themselves and build themselves up the title of "Napoleons" and "Able Managers" by grinding down the pay and trying to suppress our rights as a free and independent class of men for the purpose of adding to their already enormous salaries for their "Able Management"?

Henry Poor  felt strongly that the new rules and regulations must be faithfully followed, for "we can see no other way in which such a vast machine can be safely and successfully conducted." Nevertheless he
stressed that the engineers had a valid point and urged that the regulations be given flexibility and that discretion within certain limits be allowed. He warned railroad managers of the danger of "regarding man as a mere machine, out of which all the qualities necessary to be a good servant can be enforced by the payment of wages. Duties cannot be always prescribed and the most valuable ones are often voluntary ones. . ."

 Poor highlighted the deadening effect of fixed wages and prescribed duties on the initiative and interest of the men in the organization.  Thus with salaries determined by grade rather than by ability shown or work accomplished and with the functions of each grade specifically prescribed, Poor saw little reason for the railroad employee or official to exert himself to improve the company's service.

 There is one way in which it can, and that is to supply an adequate motive to good conduct, by rewarding merit at its worth. Till this is done, railroads, wherever they may be, will drag along in their beaten tracks of dullness and routine, and become worse managed and less productive year by year.

Poor admitted, however, that the tendency toward routine and dullness was not inevitable as long as top management provided genuine leadership. Leadership infused an esprit de corps into the organization,
which stirred the interest and initiative of subordinate officials and made strict regulation more acceptable to the employees.  At the same time leadership was essential to keep the organization operating as a single
unit. The minds of the top management, wrote Poor, must become the soul of the enterprise, reaching and infusing life, intelligence and obedience into every portion of it. This soul must not be a fragmentary or
disjointed one giving one direction to the head, another to the hands, and another to the feet. Wherever there is a lack of unity there will be a lack of energy of intelligence of life of accountability and subordination.

Such leadership, however, demands the highest talents. Not only must the top managers know how to handle men, but they must, in Poor's view, have an expert knowledge and training in all aspects of railroad
administration and operation. Yet this was rarely the case in American companies, for, as Poor wrote, railroad executives and superintendents, while understanding their own specific duties, too often were
unacquainted with those of every important department under them; there is consequently no connecting link between the different departments of service, and no intelligence to guide them to a common end. In such a case it will not be long before the morale necessary to a high state of discipline will be completely broken. Instead of a unit, the different departments of service will often be arranged in hostile attitude towards each other. Parties in influential positions, being left to themselves, soon come to regard their own interests as the
chief objects of concern.

A superior could hardly be expected to exact accountability down the line if he did not comprehend the type of work being accounted for. Nor could he make use of a carefully systematized supply of hourly,
daily and monthly reports if he were not competent to interpret and understand the data he received. His subordinates finding it unnecessary, indeed often useless, to make reports and rarely receiving explicit orders were soon carrying out their own work without supervision from above. The ultimate result was that the railroad was administered from the bottom rather than the top. If the American railroads were, therefore, to operate efficiently it was  obvious that they must be managed by men of the highest ability and
training in railroad management. Yet it was just as obvious that this was rarely the case. In trying to account for this deficiency, Poor suggested that, in the first place, railroad companies did not provide incentives
enough to attract and hold the most able men; and, secondly, they too often used other criteria than ability and training in the selection of men for the top managerial posts. Finally, railroad companies too often failed
to detect inadequate leadership within their organization. This blindness Poor blamed primarily on the inability of the roads to exact proper accountability and responsibility from their managers. The breakdown of
managerial leadership in Poor's view, was, thus, not so much the inability of human capabilities to meet the multitudinous responsibilities of top management; it was rather the failure of current business methods and
organization to meet the requirements of large-scale administration. And this organizational failure was, in Poor's mind, sharply intensified by the sudden rise of a new business phenomenon the separation of ownership and management within the railroad corporation.

By the end of the 1850's the editor of the Railroad Journal was tracing nearly all the problems of railroads to the one underlying fact that their managers did not own and their owners did not manage. The complex
requirements of large-scale railroad operation necessitating as they did, for the first time in American business, the development of a technically proficient administrative hierarchy had created a managerial class. The huge financial demands of railroad construction and operation, on the other hand, requiring a vast amount of capital from private individuals, had created an investor class and had spread ownership among a large number of persons many of whom lived at great distances from each other and from their property. Henry Poor was uncertain whether the resulting division of the business unit between management and ownership could be resolved within the accepted framework of the corporation.

To be modified once again.

Published 18 Sep 2015

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