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Why Are So Many Corporations Incorporated in Delaware?
We blanched when we noticed that two of the largest New York banks, Citibank and Chase Manhattan, were incorporated in Delaware. Both banks’ names betray their New York roots, so surely there must be some practical reasons why they chose to incorporate in another state.
Then we encountered a November 1986 Forbes article, which reported that Delaware houses more than thirty out-of-state banks. A call to the Delaware Chamber of Commerce yielded even more startling statistics. More than 170,000 companies are incorporated in Delaware, including more than one-half of all Fortune 500 companies, 42 percent of all New York Stock Exchange listees, and a similar proportion of AMEX companies.
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How could Delaware, the home of fewer than 700,000 people, house so many corporations? The answer is a textbook illustration of the ways a small state can attract big business by changing its laws and tax structure to attract outsiders. One of the reasons that Delaware attracted so many banks, for example, is that it abolished usury ceilings, which are set by the state rather than by the federal government. Let’s look at the other inducements that Delaware offers corporations seeking a home.
Favorable Tax Laws
1. No state sales tax.
2. No personal property tax.
3. No corporate income tax for corporations maintaining a corporate office in Delaware but not doing business in the state. If Chase Manhattan were incorporated in New York, New York State would demand a share of the income generated beyond its borders.
4. No corporate income tax for holding companies handling in-tangible investments or handling tangible properties located outside Delaware.
5. An extremely low franchise tax, based on authorized capital stock (the minimum is a staggeringly low $30; but there is also a maximum, $130,000 per year, that is very attractive to big corporations). Even with the low rate, the franchise tax generates 14 percent of the state’s general fund revenues—Delaware collected over $126
million in 1986.
6. The corporate tax rate itself is a low 8.7 percent and is collected only on money generated inside Delaware. Compare this to the 10
percent New York State tax and the total burden of 19 percent for companies operating within New York City.
Favorable Corporation Law
1. Delaware’s court of Chancery sets the nation’s standards for sophistication and timeliness in shaping corporate law. Don 154 / DAVID FELDMAN
ald E. Schwartz, professor of law at Georgetown Law Center, says:
“There is, by an order of several magnitudes, a larger body of case law from Delaware than there is from any other jurisdiction, enabling not only lawyers who practice in Delaware, but lawyers everywhere who counsel Delaware corporations to be able to render opinions with some confidence.” By quickly establishing precedents on the issues that confront corporate heads today, Delaware has defined the legal parameters for doing business faster and more comprehens-ively than any other state. Business leaders feel more secure in making decisions and planning for the future, because the law is set early; as Schwartz puts it, “Corporate managers and their lawyers seek predictability.”
2. In Delaware, only a majority of shareholders of a company need agree to incorporate a company. Many states require a two-thirds majority.
3. Delaware allows mergers to proceed with less intrusion than just about any other state.
4. Once incorporated, a corporation can change its purpose of business without red tape from the state.
5. The corporation’s terms of existence is perpetual in Delaware.
Some states require renewals, which involve paper work and extra expense.
Favorable Treatment of Corporate Leaders Delaware has recently enacted several laws designed to make life easier for corporate heads, particularly boards of directors.
1. Delaware law allows corporations to indemnify directors, officers, and agents against expenses and often against judgments, fines, and costs of settlements incurred in suits against them filed by third parties.
2. Delaware law makes it difficult to unseat directors of a corporation.
3. Directors of a Delaware corporation do not necessarily have to meet in Delaware. Decisions can be made by conference WHY DO CLOCKS RUN CLOCKWISE? / 155
call; they can even take an action without any meeting if there is unanimous written consent.
4. Perhaps most important in this category, Delaware passed an enabling act that allowed corporations to limit or eliminate outside directors’ personal financial liability for violations of their fiduciary duty (including potential liability for gross negligence). This rule makes it much easier to attract directors to Delaware corporations; would-be directors in many states are forced to pay high liability insurance premiums to protect themselves against just such lawsuits.
Although Delaware law does not allow directors to escape unscathed for perpetrating fraud, the knowledge that they won’t be held up for making a mistake (even a “gross” one) makes directors happy to work in the state.
Other factors also make Delaware attractive to corporations.
Unions are not as entrenched in Delaware as in most areas of the Mid-Atlantic and Northeast. Pay and cost-of-living scales are lower than in surrounding regions.
Perhaps the most enticing nontangible asset of Delaware in attract-ing business is the accessibility of government officials to business people. State Insurance Commissioner David Levinson was quoted in the Forbes article on this subject: “If you have a problem and you’re operating a company in Delaware, within 48 hours you can have in one room the governor, the insurance commissioner, the president pro tem of the senate and the speaker of the house.”
Delaware’s probusiness slant has revived what was once a stagnant economy. But has this infusion of incorporations helped the average citizen of Delaware, when most companies do not relocate there?
Evidence suggests that money has trickled down. Although there are pockets of poverty in Delaware, unemployment is now well below the national average.
The secret weapon of Delaware is its small size. A bigger state would need promises of a large number of jobs before offering financial concessions to corporations. But a small state like Delaware can siphon off the gravy and thrive. For example, Del 156 / DAVID FELDMAN
aware offers some tax breaks to out-of-state banks if they incorporate in Delaware and maintain an office with at least one hundred employees. To a multinational bank, one hundred jobs is a drop in the bucket. To a state with fewer than twenty thousand unemployed people, one hundred jobs represents a substantial opportunity.
Why Does Coca-Cola From a Small Bottle Taste Better Than Coca-Cola From a Large Bottle or Can?
Scratch any Coca-Cola diehard, and you are likely to find someone who insists that Coke tastes best out of 6½-ounce glass bottles.
While purists can handle the 12-ounce glass bottles, their eyes inevitably become glazed or downcast as soon as the words “plastic” or
“can” or “three-liter” are bandied about.
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We must confess. We have the same conviction. Yet the small Coke bottles are almost impossible to find in many parts of the country. A friend of ours, Chris Geist, who lives in Bowling Green, Ohio, once wrote a letter to Coca-Cola complaining that his family couldn’t find the small bottles anywhere. A representative from Coca-Cola came to his door, one day, like Michael Anthony on The Millionaire, with a case of 61/2-ounce glass bottles. The Coca-Cola man bewailed the demise of the small glass bottles himself, but explained that supermarkets refuse to stock them. Grocery stores don’t like the breakability of glass, and they prefer the higher profit margins provided by the larger sizes.
Despite many attempts, we could not get Coca-Cola to respond to this Imponderable, on or off the record, but we consulted several other soft-drink companies and soft-drink te
chnologists and got pretty much the same answer from all. The response of the National Soft Drink Association is typical: “What many people do not realize is that the exact same product that goes into small bottles also goes into large bottles and cans. We have found in the past that most perceived taste preferences disappear when a blind taste test is ad-ministered using a similar sample container such as a paper cup.”
Our guess, however, is that these comparisons were made under ideal conditions; the consumer is not always granted such favorable benefits. For one, the polyester resin material used in two-and three-liter soft drink bottles does not retain CO2as well as glass or aluminum. And although polyester resin provides a decent shelf life in the supermarket, the carbonation retention is not nearly as good as in other containers.
Most important, any amount of air in the head space (the top of the bottle) adversely affects the taste of the liquid. Once a bottle is opened, even if the closure is reapplied tightly, the carbonation and the taste are never quite the same again. Indeed, one of our pet theories is that simply in the time that it takes to fill a three-liter bottle, more air is trapped inside than in a small bottle. The amount of CO2in a bottle affects not only our sense of its carbonation but also our taste perception.
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We didn’t get far on the can versus bottle argument. We assumed that canned soft drinks didn’t taste as good as bottled ones because traces of the metal affected the flavor. Soft-drink experts insist that in blind taste tests, consumers can’t tell the difference, and buyers like the convenience and durability of the can. Bah humbug!
Submitted by Ronald C. Semone, of Washington, D.C.
Why and When Was 1982-1984 Chosen to Replace 1967 as the Base Year for the Consumer Price Index? Why Wasn’t It Changed After Ten Years?
The Consumer Price Index measures the average change in prices over time in a fixed market basket of goods and services. The CPI tracks the prices of food, clothing, housing, utility costs, medical care, drugs, transportation, and many other goods and services, as well as the taxes on all of these items. Prices are collected from 85
urban areas, including about 4,000 food stores, 24,000 rental units, and 28,000 business establishments, both commercial enterprises and nonprofit institutions such as hospitals.
The Consumer Price Index is based on data compiled from WHY DO CLOCKS RUN CLOCKWISE? / 159
the Consumer Expenditure Surveys. The accuracy of these data is important not only in the abstract, to economists and researchers, but in the pocketbook, to workers, whose cost-of-living provisions are keyed to the CPI. The reference base year is changed to make comparisons of rates of change easier for the public to understand.
By changing the base year every ten years or so, the numbers don’t get unwieldy. Until 1987, the base year for the CPI was 1967; the index was expressed as 1967 = 100. If the 1972 index had increased by 50 percent since 1967, it would have been expressed as 150. An index rating of 250 would mean a 150 percent jump since the reference base year.
The Bureau of Labor Statistics is not under any statutory requirement to change its base year at any particular time, though it strives to do so approximately every decade. Originally, BLS intended to change the base year to 1977, which would have been a fortuitous choice for two reasons. First, the then most recent quinquennial (five-year) economic censuses were taken for 1977, and many economic time series are tied to economic censuses. Second, the expansion of the economy in 1977 after the recession of 1974-1975 was relatively balanced, which meant that there were few extreme conditions in particular segments of the economy that would have made 1977 unrepresentative of the recent period.
The most difficult part of compiling the CPI isn’t the collection of raw data (it is time consuming, but not hard, to find out the cost of, say, dairy products in different localities throughout the country), but rather the weighting of the various sectors that the CPI measures.
In order for the index to be accurate, it must measure not only how much goods and services cost the consumer, but also what percentage of consumer expenses each category represents. It matters little if the cost of maraschino cherries skyrockets if very few consumers buy them in the first place. But if the price of a staple such as oil zooms during an energy crisis, it will have a more substantial effect on the CPI.
In the late 1970s, the Bureau of Labor Statistics was in the process of developing new systems to “weight” the different 160 / DAVID FELDMAN
components of the index, so the plan was to wait to implement 1977 as the base year until 1981, after the new weighting system was introduced. No base-year changes can be made without review by the Office of Federal Statistical Policy and Standards, Office of Management and Budget. According to Patrick Jackman, at the Office of Prices and Living Conditions of the Bureau of Labor Statistics, severe budget constraints led the BLS to ask for a postponement of the change, and they were granted it. Without these budget problems, 1977 would have been the reference base year, at least through the late 1980s. In other words, Reaganomics killed the planned base-year change.
So why have they finally made the decision to adopt the three-year 1982-1984 period as the reference base? Historically, the reference base period has tended to be three years (before 1967, 1957-1959 and 1947-1949 were the reference bases), mainly because it was believed there would be less volatility in the index if it reflected a fairly lengthy time period. Then a government interagency task force decided that the Bureau of Labor Statistics should designate a single year as the reference base period, and 1967 was chosen. The intent was to key several economic indexes to the same base year.
The Office of Management and Budget abandoned this attempt and reverted to a three-year period—1982-1984—largely because this particular period was already being used in determining the expenditure base weights.
Submitted by Daniel Marcus, of Watertown, Massachusetts.
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Why Do Firehouses Have Dalmatians?
Although today dalmatians serve primarily as firehouse mascots, back in the days of horse-drawn hose carts, they provided a valuable service. Dalmatians and horses get along swimmingly, so the dogs were easily trained to run in front of the carts and help clear a path for the firefighters to get to a fire quickly.
The breed eventually became so popular in New York City firehouses that the Westminster Kennel Club offered a special show class for dalmatians owned by New York Fire Department members.
In their book, Dalmatians: Coach Dog, Firehouse Dog, Alfred and Esmeralda Treen tell the story of a Lieutenant Wise of the NYFD
who had such a close attachment to his firehouse mascot, Bessie, that she followed him home on his days off, literally hopping on the streetcar to accompany him. If Bessie missed the car, she knew where to stand to catch the next one. Bessie also followed Lieutenant Wise into burning buildings but stayed one floor below the fighting line, “for fear a dog might cause a man to stumble if retreat was ordered.”
Dalmatians have been used throughout history for serious work: as sentinels on the borders of homeland Dalmatia and Croatia, during wars; as shepherds; as draft dogs; as hound dogs; as retriev-ers; and as performing dogs (dalmatians not only are intelligent, but have excellent memories). Dalmatians’ speed and endurance and lack of fear of horses enabled them to become superb coach dogs for fire carts. As the Dalmatian Club of America puts it, the breed was able “to coach under the rear axle, the front axle, or most difficult of all, under the pole between the leaders and the wheelers.”
The death knell of the dalmatian as a coaching dog for fire departments sounded with the introduction of motorized cars. Dalmatians like Bessie lost their function, as we can see from this sentimental lament from Lieutenant Wise:
For five and a half long years Bessie cleared the crossing at Third Avenue and Sixty-seventh Street for her company, barking a warn 162 / DAVID FELDMAN
ing to surface-car motormen, truck drivers, and pedestrians, an
d during all that time she led the way in every one of the average of forty runs a month made by No. 39. Then like a bolt from the sky the white horses she loved were taken away, even the stalls were removed, and the next alarm found her bounding in front of a manmade thing that had no intelligence—a gasoline-driven engine. Bessie ran as far as Third Avenue, tucked her tail between her legs and returned to the engine house. Her heart was broken. She never ran to another fire.
Today’s dalmatian is as likely to help in quashing fires as is Smokey the Bear. But firehouse mascots still abound, and the dalmatian is still often chosen by many firefighters in honor of its heroism in the past.
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Doughnut-Shop Employees Always Pick Up the Doughnuts With a Tissue So That Their Hands Never Touch the Doughnuts. Why Do They Then Put the Same Tissue in with the Doughnuts for the Customer to Carry Home—Germs and All?
Imponderables must have the most discerning readership in the cosmos. Who else but an Imponderables reader would raise such an important health issue, hitherto hidden in obscurity?
We contacted all of the biggest doughnut-store companies. Those that responded sheepishly admitted that the tissue, usually Sav-R-Wrap tissue, is used by employees for sanitary reasons, but couldn’t explain why the tissue, “germs and all,” is stuffed in the bag, except that it is, as Carl E. Hass, president of Winchell’s says, “placed on top of the donuts so that the customer may use it to remove the product from the bag.” The director of product marketing at Dunkin’
Donuts, Glenn Bacheller, agreed that perhaps the custom isn’t the greatest idea, and said that the Dunkin’ Donuts training department is looking into the possibility of not stuffing in the “used” tissue. Our reader may have earned a niche in doughnut history.
Why do Clocks run clockwise? Page 14