The buddy system.

• Author: Lowenstein, Louis
• Position: New model for management-shareholder relations - Chairman's Agenda: Governing for Shareholder Prosperity

The 40-year relationship that Du Pont and GM enjoyed earlier this century this century suggests an enviable model for management-shareholder relations.

Thomas A. Murphy, the former chairman of General Motors, recently wrote to a friend describing "many so-called 'investors' [as] nothing more than predators, opportunists, speculators, traders, arbitragers, scavengers, even blackmailers, whose focus is on nothing more than trying to capitalize on the short-term ...profit to them, regardless of the consequences" to others. Not accepting the responsibilities of ownership, Murphy added, they do not deserve consideration as true owners of the enterprise. Being retired, Murphy could be blunt, but any CEO still in office probably has views that are not much different.

Let me suggest an improbable model for management-shareholder relations. I call it the buddy system, like the arrangement for protecting swimmers in deep water. The most celebrated example of it was the minority interest in General Motors that the Du Pont Co. first acquired in 1918 and retained for almost 40 years, until the federal government brought an antitrust suit and forced it to divest.

The GM-Du Pont relationship was unique in the annals of American industry. In many respects, it resembled more the ties we still see in Germany, where even at the largest companies substantial blocks of stock are held, for example, by one of the major banks. In the United States, we say, it is not possible to find investors of the same substantial and enduring quality as in Germany, investors willing and able to play a constructive, but still muted, role. Saddled with high costs and other perverse incentives, our banks have virtually abandoned their traditional ties to their largest and best industrial customers. (Outside of the banking system, the American attitude is that if it's worth owning a substantial part of another company, one should insist on owning all of it.)

But a least this once it did happen here. And it succeeded so brilliantly that it is a model for what might yet be and, more immediately, a mirror to illuminate our present deficiencies.

Ultimately, Du Pont profited enormously from its investment, but that was secondary to the enormous benefits to General Motors from which Du Pont's profits flowed. During the years after World War I, General Motors was saved from quite probable extinction by Du Pont's financial support and its credibility in financial markets. Du Pont brought help to GM internally, too, installing new and better financial controls, And during those formative years, when GM was face with a managerial crisis, Du Pont lent to GM for several years Pierre S. du Pont, the best it had, as president.

Du Pont first conceived of an investment in GM as an outlet for its accumulated wartime profits at a time when William C. Durant, the president of GM, was looking for a substantial financial partner. The investment was not an obvious one at all, because the automobile business was not yet generally accepted. There were dissenting votes on the Du Pont board, but the proposal had the energetic support of Pierre du Pont and Jacob J. Raskob, the company's treasurer.

The Initial Investment

The initial investment, made early in 1918, was $25 million. Raskob had written a memorandum for the Du Pont finance committee that showed an extraordinary insight into the future of the automobile industry. In...