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CHAPTER VII

RELATIVE STATUS OF UNDERTAKING,
MANAGEMENT, AND CAPITAL

Good Management

The relative importance of the three essential features of a successful enterprise a sound undertaking, good management, and sufficient money-vary greatly with the conditions. Even in the same enterprise they are held in varying estimation by the different parties concerned, according to their point of view.

Theoretically, good management is at least as important to the financed enterprise as is the undertaking on which it is based, or the money which floats it. Occasionally, in practice, good management receives equal recognition. Thus in the Sulzberger reorganization referred to in a preceding chapter, the question of management loomed large and the manager, when found, received an interest in the enterprise which shortly thereafter was worth some millions of dollars. It is seldom, however, that management receives any such recognition. On the contrary, the owners or promoters of the undertaking on the one side, and the men with money on the other side, get together and divide the enterprise and its prospective profits between them, and then look around for an able executive who can "pull the thing through." They may pay their manager a liberal salary; they may give him some percentage of the profits; or they may even go so far as to promise him an interest—or an opportunity to earn one-in the business itself. This, however, is the usual limit. As to any material part in the enterprise itself, the manager is literally not in it. He is a necessary part of the financed undertaking, and a most important part, but he is usually thought of and fitted in afterwards; if he proves a misfit so much the worse for the enterprise.

Capital and the Undertaking

The relative status of the owners of an enterprise seeking capital and the men who have capital to put into the enterprise vary with conditions. If times are uncertain, if money rates are high and loans hard to secure, if stock prices are falling and exchange rates fluctuating widely, if the individual bank account is low, or if the enterprise itself is not of the kind that is then “in vogue," the men with money are indifferent and must be approached with deference and with persuasive arguments. If, on the other hand, financial conditions are good and money is plentiful, and especially if the particular enterprise is timely, capital and the undertaking meet on far more equal grounds, and it is then diplomacy and bargaining ability that decide their relative status and the division of the spoils.

Or if the projected enterprise is one of unusual attractiveness and is properly presented with its strong points brought into artistic prominence and its weaker features draping the far perspective, the promoters can again meet the investors on fairly equal terms. If the parties presenting such an offering have some financial strength of their own so that they can meet the capitalist with the easy independence that inspires respect, they occupy the vantage ground.

Conversely, though the undertaking be ever so good, if the parties presenting it are men of limited means and, as is so often the case, utterly unable to develop the undertaking themselves, or even hold it for any length of time, perhaps controlling it under a short option, the conditions for the men with the enterprise are exceedingly unfavorable. Then, as a rule, they must take whatever proportion of the financed enterprise the capitalist is willing to allow them, which is not ordinarily excessive.

It should also be borne in mind that the apportionment of interest between owner and investor varies greatly according to the method of financing. If interested in an enterprise, men of large means usually take it up in its entirety and supply or

arrange for all needed funds either alone or in combination with their friends or business associates. Under these circumstances they naturally expect to dictate terms.

If, however, the necessary funds are to be raised by the accumulated contributions of a number of small investors, the conditions are different. There is usually a set proposition and as there is no concert of action among the subscribers and no individual subscription of enough importance to force a change in the proposition, it is a case of "take it or leave it"-if these small investors wish to get into the enterprise at all, they must come in on the proffered terms. Needless to say, these terms, arranged to meet the views of the owner or promoter of the enterprise, are far less advantageous than those secured by the larger investors.

The Capitalistic Position

While there is no general rule as to the division of interests between the parties controlling the undertaking and those controlling capital, it may be said that when the enterprise is presented to men of means, they look for, and generally get, a controlling interest in the enterprise. They may secure more, or when the undertaking is very attractive and is presented under unusually favorable conditions, may be willing to take much less, but the general expectation of the man with money is that capital shall control.

This attitude of the capitalist is not unnatural. Money is essential. Without it nothing can be done in the industrial and business world, and it is not surprising if the capitalist, seeing the necessity and the power of money, greatly exaggerates its importance and places it above everything else.

Apart, however, from any exaggerated respect for money, the capitalist has some justification for his attitude. Theoretically the undertaking and the capital needed for its development and operation are equally important factors in any business or industrial project. They participate equally in the risks and, with

due regard to any differences in the original values involved, should participate equally in the profits. In other words the arrangement is a partnership of capital and property, and from this point of view should be governed by an equal partnership participation in profits.

From the practical standpoint, however, the situation is very different. The enterprise is unproved, while capital is of an established and known value. The enterprise is the possibility; capital is the realization. Capital has a recognized standing in every country of the civilized world and may be converted into the local standards of value of any place by a simple operation in exchange. It is the substance of things only hoped for in the enterprise, and may be transmuted at any time on a fixed basis into food, clothing, houses, automobiles, and many other desirable things. Capital is the garnered harvest; the undertaking is merely the soil of more or less unknown possibilities which must be plowed, sown, and carefully tended, and from which, if all the perils of flood, drought, frost, pestilential insects, and other destructive agencies are safely passed, a more or less plentiful harvesting of capital may at last be gathered.

The Capitalistic Demands

The hard-headed capitalist does not, ordinarily, base his demands upon any such reasoning as this. He merely recognizes the fact that money is "hard to get and heavy to hold" and that he has got it, and usually governs himself accordingly. The word "usually" is employed advisedly, as even capitalists occasionally lose their mental balance and, with a cheerfulness and prodigality that is surprising, pour their treasured hordes into fantastic schemes or barefaced swindles.

The owner of the ordinary enterprise does not, however, meet with any such open-handed reception. When he approaches with his proposition he runs counter to the capitalist on the hardheaded side and must show a reason for the hope that is in him,

and the reason must be a very sound one. If it appeals to the capitalist he will consent to consider the undertaking. If he finally approves of it, he will then agree to invest the least possible amount that will suffice to prove the value of the undertaking, and for this he will exact the utmost interest that can, under pressure, be extorted from the man in need of his money. As to the legitimacy of the capitalist's demand for the control of the enterprise, we can do no better than quote the reply of a capable New York financier to the parties who were seeking to interest him in a particularly promising scheme: "My money will make your business a success. You will not get it unless you make it worth my while and unless you give me control. I don't care to have other people spending my money."

This puts the capitalist's position very briefly and clearly. From his point of view it is ordinary common sense, and the man with the enterprise must recognize the strength of the capitalist's position and govern himself accordingly.

It should also be borne in mind that the capitalist is usually an able business man, familiar with the methods by which success is attained and, speaking generally, far better qualified to manage and direct the enterprise and its finances than is the original owner or promoter. His management and control should, of course, be under such suitable regulation and restriction as will protect all parties interested in the enterprise, but these regulations should not in any way interfere with its proper business management. If the capitalist is acting in good faith, he is usually quite willing to agree to all reasonable provisions for the protection of his associates. If he is not, the man with the enterprise would better go further, for he can certainly fare no worse.

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