Bonderman Using Socratic Method in GM Boardroom Raises Hackles

Dec. 11 (Bloomberg) -- General Motors Corp. directors once drew criticism for accepting the losses that sent the automaker into bankruptcy. The revamped General Motors Co. board charts a more activist course.

Three members from the private-equity world, Daniel Akerson, David Bonderman and Stephen Girsky, are helping Chairman Ed Whitacre impose a sense of urgency on the company’s culture. Ousting Chief Executive Officer Fritz Henderson and scuttling the sale of the Opel unit over the past five weeks may make the board the most outspoken in GM’s 101-year history.

The trio’s push for change poses new challenges for GM: balancing decisions on plants and products that can take years until fruition against the speed and aggression of private equity. That mix didn’t work so well when buyout firm Cerberus Capital Management LP ran Chrysler, which filed for Chapter 11 this year.

“Private-equity guys are more concerned with restructuring and making fast changes so they can get their return and get out,” said Thomas Stallkamp, a former Chrysler Corp. president who is now industrial partner at Ripplewood Holdings LLC. “I’m not sure if private equity is up to the capital expenditures required in the auto industry. They tend to low-ball it.”

The 12-person board’s transformation from a “rubber stamp,” as Yale University’s Jeffrey Sonnenfeld once put it, was the work of the U.S. Treasury’s auto task force, which wanted hands-on directors at Detroit-based GM.

Task Force’s Role

Whitacre, 68, and four of GM’s six other new board members were picked by task force leaders Steven Rattner, Harry J. Wilson and Ron Bloom, who has since been promoted to be the Obama administration’s senior counselor for manufacturing.

Only a couple of federal overseers remain, so the directors are essentially the government’s enforcers on its 61 percent stake -- and the trio of Bonderman, Akerson and Girsky was instrumental in CEO Henderson’s exit this month and in strategy shifts such as keeping Opel. All three declined to comment.

“There are extremes, boards that stay completely out and those that micromanage,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark. “Both are dangerous.”

The old GM, he said, “had a CEO’s board for a long time.”

A former task force member said Bonderman, 67, was chosen for his deal-making skills and hardball management approach, assets in a company seeking a turnaround and in an industry increasingly reliant on joint ventures to develop technology.

‘Tons of Turnarounds’

The founder of buyout firm TPG invested in Continental Airlines Inc. and became chairman after the carrier’s 1993 bankruptcy exit. In 2002, Bonderman negotiated down the purchase price of Diageo Plc’s Burger King unit by about a third to $1.5 billion as Fort Worth, Texas-based TPG, then known as Texas Pacific Group, and partners took control.

“He’s seen tons of turnarounds, more than just about anyone alive,” said Tony James, president of Blackstone Group LP, the world’s largest private-equity firm, who served with Bonderman on the board of supermarket operator Vons Cos. and considers him a friend. “He thinks like an owner.”

Akerson, 61, who has been at Washington-based Carlyle Group since March 2003, was selected for his operational abilities as chief operating officer of MCI Communications Corp. and CEO of Nextel Communications Inc., the former task force member said.

Girsky, 47, was picked by the United Auto Workers retiree medical trust that owns 18 percent of GM and had the right to name one director. When Whitacre took over as CEO last week, he asked Girsky to be an adviser on auto issues.

Board’s Role

A former president at New York private-equity firm Centerbridge Partners LP, Girsky previously advised the union and GM, quitting his job as a Morgan Stanley analyst in 2005 to work with then-CEO Rick Wagoner. He criticized the previous GM management for money-losing investments in automakers such as Fiat SpA, Isuzu Motors Ltd. and Fuji Heavy Industries Ltd.

“This board understands the difference between running the day-to-day business and giving good governance and oversight,” director Patricia Russo said in an interview.

GM insiders said the Bonderman-Akerson-Girsky group has brought to bear a private-equity obsession with cost at a company that needs to deploy its government-financed cash hoard to develop new cars and technology.

At a September meeting, Henderson and his team asked the board for $1 billion to fund a new engine program, which the executives saw as a routine investment. The board batted the proposal back, three people familiar with the meeting said.

Engine Questions

Directors wanted to know how GM would get a return on the investment, the people said. Management responded that car companies need new engines to boost fuel economy and meet U.S. rules. They don’t calculate what they will get from the money.

One of the three private-equity directors asked whether GM could buy an engine from someone else, two people said. “Unless you’re in aircraft or some other big industry, this might be the first time you’ve seen this kind of expense,” said one executive briefed on the meeting.

So managers had to go back, gin up a business case and get approval. It took three meetings and two months, though the board did allow engineering work to continue. The process wasted time, said one executive familiar with the debate.

The boardroom influence of Bonderman, Akerson and Girsky is shaped by their leadership style, said one executive familiar with the interchange. All are seen as asking tough and probing questions, with an approach that is more confrontational than their peers, said the person.

‘No Animus’

For Bonderman, that’s a result of his background as a litigator before going into the private-equity business and the Socratic method he honed as a law professor at Tulane University in New Orleans, said one person who has worked closely with the Texas deal-maker. He reads every document and highlights areas he wants to call out to executives, the person said.

“He has no animus, it’s not mean-spirited,” said Sonnenfeld, senior associate dean at Yale’s School of Management, who knows Bonderman. “He’s not excessively shortsighted, but private-equity firms have a mind-set that is shorter minded.”

Besides Whitacre, Bonderman, Akerson and Girsky, GM’s other new board appointees were Russo, 57, the former CEO of Alcatel- Lucent SA; Robert Krebs, 67, retired chairman and CEO of Burlington Northern Santa Fe Corp.; and Canadian business-school dean Carol Stephenson, 58, who was named by the governments of Canada and Ontario.

Five directors were retained from the pre-bankruptcy GM: Kent Kresa, 73, Northrop Grumman Corp. former chairman and CEO; Philip Laskawy, 68, retired chairman and CEO of Ernst & Young LLP; Ceridian Corp. Chairman CEO Kathryn Marinello, 53; University System of Georgia Chancellor Erroll B. Davis Jr., 65, and E. Neville Isdell, 66, ex-chairman and CEO of Coca-Cola Co.

Cerberus

Chrysler’s 2007 purchase by Cerberus set the high-water mark for private-equity investing in the U.S. auto industry. Cerberus put in $7.4 billion for an 80 percent stake in a company that cost Daimler-Benz AG $36 billion in 1998, and couldn’t keep Auburn Hills, Michigan-based Chrysler from tumbling into bankruptcy on April 1. It emerged on June 10.

Former Chrysler executive Stallkamp, the Ripplewood industrial partner, cited Jaguar and Land Rover, the former Ford Motor Co. luxury brands, as a cautionary tale on the limits of private-equity auto investing.

Ripplewood was an unsuccessful suitor. India’s Tata Motors Ltd. paid $2.5 billion for the units in 2008, then raised $750 million in October selling securities to refinance debt, completed $813 million in new financing and arranged a five-year working capital loan of as much as 170 million pounds ($275 million) with General Electric Co.’s GE Capital.

Jaguar Example

“If we’d bought Jaguar, we might not have had the patience to do what Tata has done,” Stallkamp said. “We didn’t have unlimited capital.”

Whitacre’s call to speed repayment of $6.7 billion in U.S. loans and end losses exceeding $88 billion since the end of 2004 may require a private-equity-style focus on the short term. That approach cost Henderson his job and led Whitacre to reassign more than a half-dozen top executives last week. Whitacre also has supported spending more on products and marketing.

All directors are in accord on the need for urgency, said Russo, who has met with employees to encourage change.

“This is a board of independent thinkers who have a great deal of expertise in various perspectives,” she said. “I don’t know that I would call it second-guessing as much as it is understanding. I would call it a healthy dialogue.”

To contact the reporters on this story: David Welch in Southfield, Michigan, at david_welch@businessweek.com; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net