Cover Story: Commentary
A GM POSTMORTEM: LESSONS FOR CORPORATE AMERICA
No one can relish watching the very public humiliation of Robert C. Stempel or the trauma his forced departure has caused at General Motors Corp. Given the carmaker's massive and deep problems, though, something had to happen sooner or later. So it's worth considering what lessons this messy episode offers for the rest of Corporate America.
-- Management can't hide. That's the biggest implication. All through the 1980s, managers hustled to make their companies competitive and to boost shareholder value--lest they fall victim to foreign rivals or to the raging takeover wave that was replacing poor managers. Not mighty GM. It drove along merrily, unresponsive to the changing car market. It never bothered with poison pills or other antitakeover devices, counting instead on its size for protection. But size means little to car buyers or creditors: GM's red ink, along with the prospect of sinking credit ratings that would deny it access to equity and commercial paper, eventually prompted independent directors to bring in new management.
-- Independent directors have succeeded takeovers as agents of change. Executives who relaxed because takeovers dwindled, thanks to their push for state antitakeover laws and their use of poison pills and other devices, must realize that they didn't shut off market forces. They merely distanced themselves from them. Says consultant Lilli A. Gordon of Gordon Group: "GM is a manifestation that the market for corporate control isnot dead. It's in the hands of outside directors."
-- Boards must learn to move sooner and more effectively. Boardroom culture works against bold action, particularly at companies such as GM. Although directors can quietly seek a CEO's resignation at smaller companies, they tend to be meeker at huge institutions. Since these outsiders can't possibly know nitty-gritty details, they may be reluctant to challenge a CEO. At GM, directors took a half-measure last April--appointing director John G. Smale as executive-committee chairman and demoting some Stempel lieutenants--when a clean break with the past would have been better. Action then would have hastened GM's recovery and shortened Stempel's agony. As Gordon puts it, "they started surgery months ago and never sewed up the patient and finished it until now."
-- Directors need not fear expulsion from the "club." Worry about violating boardroom protocol is often cited as a main reason for rubber-stamp boards. After all, the public approbation of being selected as a director is one of the job's rewards. And the thought of disapproval from colleagues no doubt inhibited some GM directors last April, when board counsel Ira M. Millstein had urged directors to keep Stempel as CEO but make Smale chairman. Encouragingly, Smale--who by all accounts is the most active director--is hardly being drummed out of the club now. Quite the contrary. Many top executives believe he should have moved sooner. Directors everywhere should take courage.
-- Splitting the job of chairman and CEO, while no panacea, is the way to go at troubled companies. Each job carries distinct duties: The CEO runs the company, while the chairman runs the board. A GM chief executive has plenty to do in that slot for years to come. GM's board, meanwhile, must remain active and vigilant, and that task will be easier if a nonexecutive chairman controls its agenda and the information directors receive, suggests Nell Minow, a principal at Lens Inc., an investment firm. By dividing the two positions, GM would provide a working example to other companies of a structure that many activist shareholders advocate.It would also help the carmaker regain credibility with itsinvestors.
-- Shareholders, flush with victory at GM, will demand more of boards at poorly performing companies. Activist institutions have targeted GM for years, at first getting little satisfaction from managers. Its directors, however, finally got the message. Board members can expect more direct communication from unhappy shareholders urging them to make managers more accountable. That is a positive development. In fact, what happened at GM is a good example of how things should work: During the past two weeks, shareholders were barely heard from. "Our role is to energize the directors and let them get on with it," says Sarah A.B. Teslik, executive director of the Council of Institutional Investors. "We're not trying to do directors' jobs." Or management's.
-- The job of director is being redefined. For far too many board members, the post is an honorific: Eight or so times a year they fly out to meetings, have a nice dinner together, meet the next morning, have lunch, then go home--somehow never having the time to grapple with a corporation's real problems. No longer, not if investors have their way. New federal proxy rules, which give shareholders more power (BW--Nov. 2), should speed the process.
GM probably illustrates that "there's no unmessy way to fix massive inefficiency," says Gregg A. Jarrell, an economist at the University of Rochester. Even so, "it's a mess that's getting better," notes Minow--and one that might help prevent others.Judith H. Dobrzynski