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.
In discussing this subject of relations with shareholders, it is convenient - although it might logically come a little later - to treat the subject of relations with employees and with customers. The modern corporation with broad-gauged management is no longer inclined to treat its employees or customers as if they were outsiders entitled to no special consideration. On the contrary, a direct conscious effort is continually being made to bring them into sympathy with the point of view of the management and, whenever possible, to persuade them to participate actively as shareholders in the risks and profits of the business.
Some 25 years ago, when the Emerson Drug Company first put Bromo Seltzer on the market, its distribution was stimulated by giving a share of stock in the company with purchases of a certain quantity of the product .... and the Bromo Seltzer business was a success as everybody knows who has any contact with the drug trade.†
* The above examples were cited in an editorial in Printer's Ink, March 4, 1915. † From an article in Printer's Ink of June, 1915.
Many other companies have since followed this example; but ordinarily they have made the mistake of promising extravagant returns which they were not able to realize and consequently the whole plan has, to some extent, fallen into disrepute. However, the basic idea of tying up the interests of customers in some degree with the sale of the company's products is not unsound.
In a field which is entirely unrelated, we see the same plan adopted by one of the great public utility corporations of the United States - the Pacific Gas and Electric Company. The report of this company for the year ended December 31, 1914, states that a campaign to induce its customers to become further interested in the operation of the company by purchasing first preferred stock had been successful, $4,000,000 of this stock having been taken up by customers and over $500,000 additional by employees. In the first six months of 1915, an additional $1,800,000 of the stock was sold to 1,069 customers. These last figures show that the stock is being widely distributed in small blocks.
It is clear that one result of this policy must be to secure a higher degree of local public interest and to strengthen the bonds which unite the corporation in friendly relations with the communities which it serves.
The same idea is sometimes used by local enterprises. The Twin City Ferry Company of New York recently sent out a circular letter which begins as follows:
This Company has some stock to sell (not much) and realizing the advantage of having our patrons interested in the profits of the business, I am writing some of the people who use the ferry and consequently know its value.
The idea has been used again with success in securing new capital for extending a moving picture theatre. In all probability the policy of appealing to customers and prospective customers could be applied advantageously in thousands of other enterprises. Many an owner of a small business who chafes helplessly against his "lack of capital" and blames the "trust" for his poor success, could obtain all the capital he needs if he would work out a sound proposition and present it by letter or in person to the people who are already interested as his customers.
The sale of stock of a corporation to its employees is usually regarded as a device for profit-sharing and as fundamentally a method of cultivating the good-will of employees rather than a method of raising capital. This is, in fact, usually the case, and yet we need not overlook entirely the other phase of the transaction. As an example of an excellent presentation of an offer of stock to employees, we cannot do better than quote below from a singularly effective circular sent out in March, 1914, by Charles E. Murnan, Secretary of the United Drug Company. This company is a co-operative corporation, the stock of which is owned by a large number of drug shops throughout the United States. The circular from which the following quotation is extracted was addressed to drug-shop owners who are stockholders in the United Drug Company, with the request that they bring it to the attention of their clerks:
What is here presented is, beyond question, the greatest force for good to your business and ours that has ever been set in motion. It will aid you in keeping good men when you find them because they have an interest to bind them.
Our 7% Preferred Stock has been sold for a long time at $55 a share, that is, $110 for two share lots. Its intrinsic value is a great deal more. I have induced our Board of Directors to set aside a block of this stock to be sold to your store managers and clerks at its market price, $55 a share, and allow them to use the checks enclosed as part payment, as per terms on back of checks, which will give it to them at par, $50, and besides they may pay for it by saving a little each week. Each check is good for $10 credit on each subscription for two shares ($110). They have ten months in which to pay for it at the rate of $10 on the tenth of each month. The same terms apply to each two-share lots subscribed for. For instance, if an employee wants six shares ($330), he would use three $10 checks for a credit of $30 on the whole and pay $30 a month, etc. Subscriptions and credit checks may be sent at once; cash payments begin April 10.
I know what a clerk thinks about, because I have been one. I know what a salary alone means, because I have been in that position. You may have been there also. As long as salary is the only incentive, a clerk will work for little else. You say this is not so in your case, because you have good fellows who are loyal and do the very best they can. No man does the best he can. Each little incentive is additional motive power to his effort and, there being no corners on inspiration, therefore no limit can be reached. You cannot get the best that is in a man unless he looks at life on a bigger scale. Real work and worth are the result of ambition - ambition to do better and be more.
Anybody who saves will give better service and that is what you need in your business. A man's heart is where his interests are. This inducement is given to make your employees take more interest in your business. They will get it only if they agree to save it and add more to it. We want them to have an interest in this great organization just as you have, if only a small one. We are willing to do something for them if they will do more for you and they will do it. Put this proposition up to them and let them decide. They are indebted to you for it because you have made it possible.
You may say to this that $110 does not amount to anything, that it is not enough to stimulate interest or additional loyalty or anything else. You are absolutely wrong about it. Fortune has never yet been able to establish a standard. Life is comparative. One hundred and ten dollars to some people is as much as a million to others. I know when I was working in a store, if somebody had given me a chance to get some stock in one of the biggest organizations in the world, I would have been the proudest fellow in my town.
Note the informal tone of Mr. Murnan's circular and the skill with which he appeals to the interests of the proprietors who should be pleased to have their employees invest in the United Drug Company's stock. It is a thoroughly legitimate, effective plan for accomplishing two results: first, disposing of a certain amount of stock at a fair price; second, enlisting the increased interest of a class of men who can do much to increase the sale of the company's products.
While it is true that proper relations with shareholders, customers, and employees should be carefully cultivated in order to be in position to secure their co-operation and to sell them securities from time to time, there is grave danger in a practice which some concerns have been guilty of, viz., that of utilizing their lists of shareholders and customers in an endeavor to sell them the securities of other companies. In 1914-1915 an important correspondence school was subjected to bitter attacks and to serious injury because it was found that its prestige as an educational institution had been used in order to permit its officers to dispose of stocks of various enterprises in which they were personally interested.