An Equitable Distribution of Profits
Tom Watson Sr.'s Stakeholder Relations
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Published August 29, 2021
Updated October 15, 2023 |
Thomas J. Watson Sr.'s Message to His Shareholders in 1944
- Overview
- Thanks to Investor Man: Our Shareholders
- The Importance of Consumer Man: Our Customers
- The Importance of Worker Man: Our Employees
- An Obligation to the Community of Man: Fighting Fascism
IBM's Chief Executive Message to Shareholders in 1944
Business exists to provide a service to MAN—service to consumer man, to worker man, to investor man, and to the community of man.
THINK Magazine, “A World Citizen Cited by Many Governments,” July 1956
Overview
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On April 25th 1944, Thomas J. Watson Sr. reported on the status of the company to his stockholders at the Annual Stockholders' Meeting held in New York City. It was during World War II and he had taken actions that directly affected the returns of the company's owners.
Today, many that believe in shareholder-first and -foremost would state that these investments were a direct threat to maximizing shareholder value: he had limited profits; he had improved employee benefits; he had spent money on research and development; and he had cut costs by investing in operational improvements, and then he gave back those efficiency gains to the U.S. Government. |
Watson speaking at Annual Shareholders' Meeting
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IBM's chief executive understood the necessity of a self-maintaining, sustainable, stakeholder ecosystem. His job was to communicate that need to his shareholders. This speech, a short excerpt from an eight-page review of the status of the business shows the balance Watson Sr. always sought in talking with any of his stakeholders.
This day, Watson Sr. needed to explain why the shareholders should continue to support these investments in employees, in customer products and in protecting democracy in its struggle with fascism around the world.
All headings have been added by this author and are solely his responsibility.
This day, Watson Sr. needed to explain why the shareholders should continue to support these investments in employees, in customer products and in protecting democracy in its struggle with fascism around the world.
All headings have been added by this author and are solely his responsibility.
Thanks to Investor Man: Our Shareholders
"At this point I want to thank the stockholders who are present, and all of the other stockholders, for allowing me to establish a policy early in my connection with this business of withholding a part of the profits to finance the business [emphasis added].
"For the benefit of stockholders who have never received this report from me, I want to explain why I decided that was the best policy for the stockholders. ...
"When I started with the company, a purchaser of $2,500 worth of stock who exercised his rights on three occasions when we offered a small amount of stock for sale, had a total investment of $5,762.25. That stockholder, by retaining his stock dividends, today has 940.62 shares valued at today's market at $159,435.09. That same stockholder has received in cash dividends over this 30-year period $74,125.00 or a total return of $233,560.09 as of today's market, on an original investment of $5,762.25. ... [Watson Sr. returned from 1923 to 1956 a compound annual growth rate of 16.69% to his shareholders.] ...
"I want to tell you some of the things that have a greater influence and bearing on this business than the average person realizes. ..."
"For the benefit of stockholders who have never received this report from me, I want to explain why I decided that was the best policy for the stockholders. ...
"When I started with the company, a purchaser of $2,500 worth of stock who exercised his rights on three occasions when we offered a small amount of stock for sale, had a total investment of $5,762.25. That stockholder, by retaining his stock dividends, today has 940.62 shares valued at today's market at $159,435.09. That same stockholder has received in cash dividends over this 30-year period $74,125.00 or a total return of $233,560.09 as of today's market, on an original investment of $5,762.25. ... [Watson Sr. returned from 1923 to 1956 a compound annual growth rate of 16.69% to his shareholders.] ...
"I want to tell you some of the things that have a greater influence and bearing on this business than the average person realizes. ..."
The Importance of Consumer Man: Our Customers
"We cannot survive as a company unless we give good service. ... We have to give service, because when machines do not measure up to the requirements of the users they will not continue to pay rent. That is why we give so much attention to the servicing of our machines, to the teaching of our customers' employees; to the improvement and development of our products and the continuing education of our people. ...
"Our progress depends on our development work. ... From 1920 to 1943 we spent over $17,000,000 on development engineering. ... Since 1914 we have had issued to us some 1,975 patents, including 26,237 claims. ... During the year we filed 86 patent applications. We now have pending 241 patent applications, including 4,820 claims. ..."
"Our progress depends on our development work. ... From 1920 to 1943 we spent over $17,000,000 on development engineering. ... Since 1914 we have had issued to us some 1,975 patents, including 26,237 claims. ... During the year we filed 86 patent applications. We now have pending 241 patent applications, including 4,820 claims. ..."
The Importance of Worker Man: Our Employees
"I have told you about our material assets, all these machines, the growth and development of the business and the increase in the value of the stock: but all those things would be of no value were it not for the human assets—the men and women in our business. That is why we pay the full premium on their insurance and provide other benefits. ...
"We require good talent, and we pay high rates for that talent, and always are going to. As a result of that policy we are able to do more things for the employees because we have employees who are more interested in their work and who do better work. ... During the depression years we did not discharge any employee except for cause, and we gave orders to fill those places with heads of families in our communities who were without jobs. ... We have tried and will continue to try to treat everybody fairly. ...
"Since we met last we have announced an improved health and accident plan for all employees. ... The [new] plan places the women of the organization on exactly the same basis as the men, which had not been the case through the IBM Health Association, under which the women received only half the benefits the men received. I want you to know exactly what our policy is in this connection because it costs you a lot of money. ...
"When they [the employees] thank the company and thank me for these different things, I am always able to tell them honestly that they are under no obligation, because we would not be able to do these things if they had not earned them and that everything which has come to them has come as a reward for services rendered. ...
"I mention these things because I want you to know that IBM is neither a Santa Claus nor a philanthropic organization. We love to do these things for employees but if they had not paid, and paid well in dollars and cents, there would be no IBM company, because we would have failed in a very short time. ... "
"We require good talent, and we pay high rates for that talent, and always are going to. As a result of that policy we are able to do more things for the employees because we have employees who are more interested in their work and who do better work. ... During the depression years we did not discharge any employee except for cause, and we gave orders to fill those places with heads of families in our communities who were without jobs. ... We have tried and will continue to try to treat everybody fairly. ...
"Since we met last we have announced an improved health and accident plan for all employees. ... The [new] plan places the women of the organization on exactly the same basis as the men, which had not been the case through the IBM Health Association, under which the women received only half the benefits the men received. I want you to know exactly what our policy is in this connection because it costs you a lot of money. ...
"When they [the employees] thank the company and thank me for these different things, I am always able to tell them honestly that they are under no obligation, because we would not be able to do these things if they had not earned them and that everything which has come to them has come as a reward for services rendered. ...
"I mention these things because I want you to know that IBM is neither a Santa Claus nor a philanthropic organization. We love to do these things for employees but if they had not paid, and paid well in dollars and cents, there would be no IBM company, because we would have failed in a very short time. ... "
An Obligation to the Community of Man: Fighting Fascism
"As all of you know, we have been engaged in the manufacture of munitions of war. The only regular IBM products we have manufactured since Pearl Harbor have been machines ordered by the Government for its various branches and for essential munitions plants. You will be interested to learn that we have been called upon by our Government to manufacture 31 different war products. ...
"That is quite a diversified line for a company of our size, but, due to the fact that we were prepared and qualified to do close precision work, we have been honored by being called upon by our Government to make some intricate mechanisms and to do some fine engineering. ...
"We are making war products in our Endicott, Poughkeepsie and Rochester plants. ...
"Our factory at Poughkeepsie has manufactured at different times three different and distinct types of guns, and has done it efficiently. The first order we took was for 20 mm. cannons. The price was set by the Government. I told General Gillespie at the beginning that if we could find better ways of manufacturing the cannons than we knew at that time, we voluntarily would reduce the cost. It is most gratifying to be able to tell you this morning that the last cannons we shipped on that order were billed at only 52.9 per cent of the price set by the Government. ...
"In connection with all of our war contracts made with the United States Government, we decided more than a year before the renegotiation law went into effect that we would limit our profit on these contracts. We finally decided on a formula whereby we would take not more than 1 1/2 percent net profit after taxes [final audited results showed less than 1 percent] on all of our war contracts with the United States Government. ...
"Our stockholders can feel, and I am sure they will all be glad to feel, that our profit on munitions contracts has been on a very reasonable basis. ... "
"That is quite a diversified line for a company of our size, but, due to the fact that we were prepared and qualified to do close precision work, we have been honored by being called upon by our Government to make some intricate mechanisms and to do some fine engineering. ...
"We are making war products in our Endicott, Poughkeepsie and Rochester plants. ...
"Our factory at Poughkeepsie has manufactured at different times three different and distinct types of guns, and has done it efficiently. The first order we took was for 20 mm. cannons. The price was set by the Government. I told General Gillespie at the beginning that if we could find better ways of manufacturing the cannons than we knew at that time, we voluntarily would reduce the cost. It is most gratifying to be able to tell you this morning that the last cannons we shipped on that order were billed at only 52.9 per cent of the price set by the Government. ...
"In connection with all of our war contracts made with the United States Government, we decided more than a year before the renegotiation law went into effect that we would limit our profit on these contracts. We finally decided on a formula whereby we would take not more than 1 1/2 percent net profit after taxes [final audited results showed less than 1 percent] on all of our war contracts with the United States Government. ...
"Our stockholders can feel, and I am sure they will all be glad to feel, that our profit on munitions contracts has been on a very reasonable basis. ... "
Thanks Shareholders for their Support
"I want to thank the stockholders who are present and all the others for the cooperation they have given to the Board of Directors, to me and to the other officers of the company in allowing us to use our judgment, to experiment and try out the things which we have been able at all times to prove to our stockholders are sound dollars and cents investments."
Thomas J. Watson Sr., 1944 Annual Shareholders' Meeting