My Years With General Motors

by Alfred P. Sloan Jr.

  So much for the evolution of the forms of policy making in General Motors. I want to say something now on my philosophy of the role of the board of directors, the supreme body of the corporation. The board, of course, functions as boards of large corporations usually do, in good part through its committees. There are four such committees in General Motors, each of which is composed exclusively of directors, authorized to exercise the powers of the board in the management of the business and affairs of the corporation. These are the Finance, Executive, Bonus and Salary, and Audit committees. I shall comment here only on the two that are the central authority for policy determination—the Finance Committee and the Executive Committee. The majority of the members of the Finance Committee are "outside" directors, that is, directors who are not active in the management of the business. They include former operations officers, like myself, and directors who have never been associated with the corporation except on its board. All of the members of the Executive Committee are directors who are active in management. Both committees deal with problems of policy as distinct from administration. The actions of both committees are subject to revision by the board.

  The central responsibility of the Finance Committee is the corporation's purse. This committee has authority under the by-laws to determine the financial policies of the corporation and direct its financial affairs. It has authority over all capital appropriations and over entrance into any new fine of business. It reviews and approves pricing policies and procedures as formulated by the Executive Committee. It has the responsibility to see that the corporation has adequate capital for its needs, and that it earns a satisfactory return on its investment. And this committee makes the dividend recommendation to the board.

  The Executive Committee is responsible for operating policy. I have described earlier how policies have been developed in the policy groups, whose function is to channel the work of the operating staffs and other authorities in the corporation. However, the actual adoption of operating policy is the responsibility of the Executive Committee. Appropriation requests for capital expenditures are prepared under the supervision of this committee, for submission to the Finance Committee. In practice the Finance Committee has delegated to the Executive Committee the authority to approve capital expenditures up to $1 million.

  The General Motors board as a whole meets regularly once a month and at times on special occasions. From time to time it elects from its members those who are to serve on the committees I have described. It also elects those who are to administer the business —that is, the officers of the corporation—and acts on legal and general corporate matters requiring board action, such as the declaration of dividends or the issuance of additional securities.

  Furthermore, to my way of thinking, based on my experience, the General Motors board of directors has still another and, I believe, unique function of great significance. That is what I call an "audit" function. I do not mean audit in the usual financial sense but one that contemplates a continuous review and appraisal of what is going on throughout the enterprise. General Motors is, of course, both large and highly technical in all its ramifications. It is therefore impossible to conceive of every member of the corporation's board of directors having intimate knowledge of and business experience in every one of the technical matters which require top-level consideration or action. Also, those of its members with outside responsibilities would not have the time to examine and decide upon all such matters. The problems are too many, too diversified, and too complex. Nevertheless, although the board may not be equipped to deal with technical operating problems, it can and should be responsible for the end result. The General Motors board deals with the corporation's affairs before the fact through projections of what we hope to accomplish and after the fact through evaluation of reports and other data; and it is prepared to take proper action where needed.

  For this purpose the General Motors board receives a comprehensive picture of the enterprise and its operations. Reports from its Executive and Finance committees are presented monthly, and those from other standing committees periodically, covering their actions. A visual presentation on a screen sets forth for examination every material aspect of the corporation's position, financial, statistical, and competitive, and a forecast of the immediate future. This is supported by explanatory comments and also by a summary of the general business outlook. In addition, operating officers make oral reports on the corporation's business in various areas. Also, formal presentations are made to the board regularly by various staff vice presidents and top operating executives covering developments in their fields of responsibility. Board members then ask questions and seek explanations. This audit function, as the General Motors board exercises it, is of the highest value to the enterprise and its shareholders. I cannot conceive of any board of directors being better informed and thus able to act intelligently on all the changing facts and circumstances than is the board of General Motors.

  Chapter 11 - Financial Growth

  General Motors is a growth company, and the sum of all I have said is expressed in this fact. For most of the early period of General Motors' existence, it did not grow as fast as the automobile industry as a whole. But after 1918, and more particularly because of the measures taken by the modern administration, the corporation grew faster than the industry and became its number-one producer. We like to believe that we have made a contribution as an industrial leader. Employees, shareholders, dealers, consumers, suppliers—and the government to a large degree—have shared in the success of General Motors. Although progress has been achieved for all of these interests, the story of financial growth in this chapter reflects mainly the point of view of the shareholder.

  How has the corporation served its owners? I believe this can best be seen by looking at the financial record of the business—how the funds were supplied or secured, and how they were used from the beginning to the present.

  Our shareholders have derived a substantial monetary benefit from the success of the business through the distribution of about two thirds of the income realized since inception—a proportion which is larger than that distributed by most businesses. In order to secure these benefits, the shareholders have underwritten the growth of the enterprise by their willingness to reinvest the substantial sums required to meet the needs of the business as it grew. Of necessity, during periods of expansion of facilities and of peak working-capital needs, this has meant that dividends have been something less than average. The shareholders thus assumed the risk of building for the future with no certainty of a return, and in the early periods the return was slow in coming. The financial community in general at that time was bearish on the automobile industry and its prospects, including General Motors. Many companies then in the automobile industry—all with a desire for success —are no longer in existence, with consequent loss of their shareholders' investment. Thus, it seems only proper to measure the monetary return of General Motors' shareholders against the risks they assumed when investing in an enterprise with an uncertain future.

  Broadly speaking, from the financial standpoint three periods have characterized the corporation's existence. The first was the long-term period of expansion from 1908 through 1929; the second, the depression and World War II years from 1930 through 1945; and the third, the post-World War II years, which brought a renewal of expansion.

  Within these periods, however, there were sub-periods of expansion, contraction, and stabilization. I have related how Mr. Durant in the years 1908 and 1909 created the corporation by combining a number of enterprises, most importantly Buick and Cadillac and a few makers of car components, and how the tremendous problems of financing this endeavor cost Mr. Durant his position in the corporation in 1910. Then, this initial period of rapid expansion was followed by contraction and stabilization between 1910 and 1915 while the bankers pruned and righted the enterprise. The corporation grew slightly, but less than the industry. Again, between 1916 and 1920, particularly in the period 191
8-20, Mr. Durant— now working in collaboration with Mr. Raskob and the du Pont interests—expanded the corporation by various financial means, including debt and stock issues.

  The Early Expansion Period — 1918 through 1920

  In the three years 1918 through 1920 the corporation's expenditures for plant and equipment totaled some $215 million. In addition, between January 1, 1918, and December 31, 1920, more than $65 million was invested in subsidiary companies not consolidated, bringing the total outlay to over $280 million. This was a truly staggering sum for that period when you realize that at the start of the program on January 1, 1918, General Motors' total assets were about $135 million and its entire gross plant amounted to only $40 million. By the end of 1920 total assets had reached about $575 million, more than four times the amount at the end of 1917, and gross plant of almost $250 million was more than six times as great as the December 31, 1917, balance.

  Despite some unfortunate investments—Samson Tractor, for example—this expansion program established principles which were to guide the corporation's investments in the period after Durant lost control. As the annual report for 1920 stated it:

  The officers and directors of the corporation have thought it unwise to undertake the production of materials that do not relate largely to the automobile [that is, the bulk of the production of which does not go into car production]. Thus: a comparatively small portion of the total tires produced are consumed by the automobile manufacturer, the larger percentage being sold directly to users of cars for replacement purposes; the greater part of the production of sheets and other forms of steel is consumed by trades other than the automotive industry; therefore investment in these fields has not been made. By the pursuit of this policy, General Motors Corporation has become firmly entrenched in lines that relate directly to the construction of the car, truck or tractor, but has not invested in general industries of which a comparatively small part of the product is consumed in the manufacture of cars.

  The capital expenditures of the 1918-20 period were responsible for General Motors' great growth—of a different kind—in the 1920s. At the beginning of 1918 General Motors had just four passenger car manufacturing divisions—Buick, Cadillac, Oakland, and Olds— and one truck division. It had no capacity to manufacture a smaller car for the low-price field. It had no allied source of supply for many components and accessories—such as lighting, starting and ignition sets, roller and ball bearings—and no research facilities. Sales of General Motors cars and trucks in 1920 (393,000) were almost twice those of 1918 (205,000). Our productive capacity increased from 223,000 car and truck units a year at the beginning of 1918 to 750,000 units in 1922, a large part of the increase represented by facilities to make the popular-priced Chevrolet. In addition, the corporation had sufficient capacity to manufacture its own electrical equipment, radiators, antifriction bearings, wheel rims, steering gears, transmissions, engines, axles, and open bodies, and it had a source of supply of closed bodies, which were just becoming popular, through its interest in the Fisher Body Corporation. And General Motors had its own research facilities.

  Needless to say, so rapid a growth could not have been financed entirely out of earnings. The industry was still getting started and in General Motors it was a case of laying a base for the years of high production ahead. To acquire the assets of Chevrolet and United Motors and to purchase a 60 per cent interest in the Fisher Body Corporation, General Motors paid with its own securities. But most of the expenditures were made in cash, and so the corporation had to go to the capital markets. On December 31, 1918, the board of directors authorized the sale of 240,000 shares of common stock to du Pont in order to provide additional capital for the expansion program. This netted the corporation close to $29 million. In May 1919 the corporation authorized Dominick and Dominick of New York and Laird and Company of Wilmington to form a syndicate to sell publicly an issue of 6 per cent debenture (preferred) stock. As Mr. Durant wrote the underwriters:

  This corporation requires a large amount of additional money to avail [itself] of the opportunities ... to extend its business profitably and has decided that the most provident way to obtain this money is through the issue of additional debenture stock . . . Furthermore, it is greatly to the interest of a corporation carrying on such a business as ours to have as many persons as possible interested in its prosperity. Accordingly, it desires to issue and to have distributed as broadly as possible, within three months after the closing of the present Liberty Loan Campaign, $50,000,000 in par value of its debenture stock . . .

  If you will proceed forthwith to form a syndicate for the purpose of distributing this proposed issue of debenture stock and . . . will definitely agree to take for such syndicate, $30,000,000 in par value thereof . . . we agree that such $30,000,000 par value of debenture stock, together with the whole or any part of an additional $20,000,000 thereof, shall be available to you . . .

  When the syndicate was closed on July 2, 1919, only $30 million par value of the stock had been issued, with proceeds of $25 million to the corporation; none of the additional $20 million had been sold.

  These issues were not enough to meet both the plant-expenditure and working-capital demands, particularly for inventories, which rose even more than expenditures for new plant and equipment. Early in 1920, therefore, in another major financing, holders of outstanding shares of 6 per cent preferred and debenture stock were given the right to subscribe to two shares of new 7 per cent debenture stock—to be paid for either wholly in cash or one half in cash and the balance with one share of the old 6 per cent preferred or debenture stock. Mr. Durant told the shareholders:

  A careful forecast, looking far into the future, indicates that, for your corporation to continue occupying its leading position in the automobile industry, large capital investments will be required, which requirements can likely be better met by financing that portion of our growth which is not supplied from earnings, through the sale of a seven per cent. (7%) rather than a six per cent. (6%) senior security. This at once gives us an opportunity and a privilege; an opportunity to issue our senior securities at or above par, instead of at the substantial discount necessary in the sale of our present securities, and the privilege of extending to our senior security holders the right to subscribe to this new seven per cent. (7%) debenture stock on a most attractive basis.

  The new issue was a failure. It revealed the concern with which the financial community regarded General Motors' growing inability to control its internal affairs. Mr. Durant and Mr. Raskob had hoped to raise about $85 million through the new debenture issue. They were able to raise only $11 million. Hence the du Ponts had to intervene, and with their aid General Motors sold more than $60 million worth of new common stock in the summer of 1920, and a little later borrowed over $80 million from a group of banks.

  Altogether, General Motors increased its capital employed (Note 11-1.) by some $316 million during the expansion period from January 1, 1918, to December 31, 1920. Of this increase, $54 million came from earnings reinvested in the business after payment of dividends totaling $58 million. The rest of the increase resulted largely from the sale of new securities for cash and the issue of new securities in payment for properties acquired.

  This increase of $316 million in the corporation's capital employed from the beginning of 1918 to the end of 1920 compares with: expenditures of some $280 million for plant and equipment and for investment in subsidiary companies not consolidated; and vastly enlarged working-capital (Note 11-2.)

  items, of which the major one, inventories, increased $118 million, or from $47 million to $165 million.

  A Short Period of Contraction—1921 and 1922

  The expansion of 1918, 1919, and 1920 was followed by contraction in the pruning of 1921 and 1922. By the end of 1922 bank debt had been liquidated and inventories and plant were conservatively valued, and when the dust settled we were ready with a capacity to produce 750,000 cars and trucks a year, although we sold only 457,000 in 19
22.

  A Period of Firming Up—1923 through 1925

  Although the year 1923 marked the start of a great new era of expanded production in the automobile industry, the three years 1923 through 1925 involved no important expansion of productive facilities in General Motors, for the Durant-Raskob program had provided a sufficient base to meet a considerable growth in the car market. Our sales of 836,000 cars and trucks in 1925 were 83 per cent greater than the 457,000 sold in 1922. However, in the three years 1923 through 1925 the corporation spent less than $60 million for plant and equipment while providing nearly $50 million for depreciation. The new controls operated so well that this increase in sales volume was accompanied by a decrease of $5 million in inventories, from $117 million at the beginning of 1923 to $112 million at the end of 1925. In the same period net working capital increased $55 million, or 44 per cent, while dollar sales went from $698 million in 1923 to $735 million in 1925 and net income increased from $72 million in 1923 to $116 million in 1925. All told, as a result of our producing more cars more economically, our net income totaled $240 million in the years 1923 through 1925. Of this sum we paid out $112 million to the holders of common stock and $22 million to preferred shareholders, a total of $134 million, or 56 per cent of the total net income for the period.