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CORPORATE GOVERNANCE CASE STUDY----General Motors

general motors and pierre du pont

In 1915, the Treasurer of the DuPont Company, Jacob J. Raskob, persuaded Pierre S. du Pont to buy 2,000 shares of a fledgling company called General Motors (GM). Raskob had been interested in the motor vehicle industry for some years, believing that it would enjoy enormous growth when life settled down after the war.

General Motors at this time was a motley grab-bag of small companies including Buick, Cadillac, Oldsmobile, and Oakland, which later became Pontiac. The companies were joined only by the fact that they had been bought by GM’s founder, the visionary but unpredictable William Crapo Durant. Durant, at one time a highly successful carriage engineer, had been acquiring small motor companies and parts manufacturers since 1904. By 1914, GM was the second largest automaker in the country, though admittedly a very distant second to the mighty Ford.

Pierre du Pont’s personal investment of 2,000 shares proved bountiful. By December 1915, the shares that du Pont had bought for $82 had shot up to $558. The rise did not reflect GM’s growth so much as the massive industrial expansion generated by the war effort. However, the rapid increase in value was enough to persuade du Pont that he had stumbled on a very promising business. In 1915, Pierre du Pont joined GM’s board, unofficially as chairman. (In line with convention, we will refer to the company as DuPont, and the person as du Pont.)

In fact, GM was dogged by uncertainty; mismanagement constantly threatened to throw the company into bankruptcy. Durant was regarded by contemporaries as too much of a genius to be a successful businessman. GM’s headquarters consisted only of Durant, a few assistants and a handful of secretaries, so that Durant had neither the time nor the resources to exert central control. Moreover, he planned only on the basis of ever-increasing sales producing consistently improving cash flow so that even the slightest recession could leave Durant unable to pay his workers or suppliers. In 1910, such a drop had left GM close to collapse. The company was only rescued by the infusion of a $15 million loan from Durant’s bankers, who assumed control of the company as collateral. In 1915, with GM’s stock price booming once again, Durant set out to reclaim his company from the banks. By April 1915, Durant had been able to buy 50 percent of General Motors stock via a series of hastily constructed deals. Durant claimed that he had the support of du Pont – an assertion that Pierre read with astonishment in his Delaware newspaper.

Pierre du Pont agreed to serve as chairman because he wished to protect his investment. While he admired Durant’s drive and imagination, he believed him to be financially haphazard and without discipline. He wished to impose some of the rigorous financial controls and committee structures that characterized Pierre’s own DuPont Company. Durant had other ideas; he wanted du Pont’s financial backing, but not his advice. In the words of business historian, Alfred Chandler, Durant “had no intention of working with his board. He considered it merely a paper organization, that he had to have to meet legal requirement and accepted business practices. The founder, who had regained his company, was going to run it by himself.”[i]

Durant contemplated a five-man board, a three-man executive committee, and no finance committee. Raskob and du Pont refused, believing that strict financial control was the only thing that could prevent Durant from running amok. They insisted on a large board, with both financial and executive committees. Not that this rendered Durant accountable. As Chandler writes, “The meetings of the board itself were called only on the shortest notice and then at the initiation of the president, not the chairman.”[ii] The result was constant friction between du Pont and Durant. Pierre demanded monthly balance sheets to be presented to the finance committee, but often didn’t receive them. He insisted that Chevrolet be merged with the GM parent to sort out some of the financial tangle that existed between the two companies and to create an ordered, single corporation. Durant gave in reluctantly.

Ultimately, du Pont gained the upper hand in the relationship because he had the money. Increasingly, Durant relied on du Pont to help out his cash-starved company. After rising at the beginning of the war, auto stocks collapsed as the market recognized that people wouldn’t be buying cars for a while. In late 1917, it became apparent that GM would not survive without the kind of investment that only the DuPont Company could provide.

DuPont at this time was rich, with $90 million earmarked for investment. Of that, only $40 million was to be spent on the chemical industry, leaving $50 million for outside projects. Pierre du Pont thought a stake in a business that was sure to expand postwar made perfect sense. After long negotiations with the DuPont board, the company bought $25 million of GM common stock in January 1918. This was equal to a 23.8 percent stake.

A crucial part of the deal was that, in exchange for its cash, DuPont would gain control. Pierre insisted that the finance committee be comprised of a majority of du Ponts, and be chaired by Raskob. Pierre’s idea was that if DuPont could exert strict financial control, Durant could take charge of operations. Pierre wished to exploit Durant’s drive and imagination but to keep it under his own disciplined oversight.

GM, meanwhile, was engaged on an ill-advised program of expansion, as the company set out to integrate its operations vertically by buying a major supplier, dramatically increasing production capacity. It also bought Fisher Body Corp. for nearly $28 million, and GM’s workforce increased exponentially. As the expansion continued, DuPont was required to add fresh infusions of capital. By the end of 1919, DuPont had increased its investment in GM to $49 million, equal to a 28.7 percent stake.

The strategy didn’t survive the onslaught of the postwar recession. As demand collapsed still further in the ravaged American economy, Ford slashed prices, knowing that GM would have a hard time doing likewise. Ford took an even greater slice of market share, capturing 60 percent in 1921, up from 45 percent in 1920. GM’s market share fell from 17 to 12 percent over the same period. GM was capturing a diminishing share of a diminishing market. The company’s sales declined three-quarters between the summer and winter of 1920, and in January 1921, the company recorded an all time low in the production of vehicles.

The combination of the expansion and the recession was disastrous. Worse, Durant made a desperate single-handed effort to prop up GM’s collapsing stock price. Borrowing money from whatever sources he could, he bought up GM stock as it was dumped by the market. In November 1920, Durant’s debt amounted to some $38 million as GM neared financial collapse.

Pierre du Pont was faced with a choice. He could abandon the troubled company and cut his losses on the investment, or he could stand by his initial belief that GM represented a potential high-growth company and take steps to ensure its survival. He opted for the second choice, bringing his financial credibility to bear in persuading J.P. Morgan to refinance GM. At the same time, DuPont contributed still more money, raising its stake to 36 percent.

Having restored the company’s ability to operate, Pierre du Pont took a huge step in ensuring that GM wouldn’t run into such problems again. In December 1921, Durant was forced to resign and Pierre took over the presidency of the company himself. He set about reorganizing and revitalizing GM, making DuPont’s investment spectacularly profitable. By 1928, when Pierre retired as chairman of GM, the company had surpassed the once unassailable Ford as the nation’s number one automaker. GM still holds that distinction today.

Part of the reason for du Pont’s success at GM was his recognition of the management genius of Alfred Sloan, who would continue to be involved at GM until after World War II. Pierre stayed on as president until 1923 – just long enough to ensure GM had sound financial foundations – before handing over to Sloan. Sloan, in turn, was responsible for the reinvention of the motor car as a work of style and design, in contrast to Ford’s one-type-only Model T.

Sloan’s leadership also transformed GM’s operations, creating the multidivisional structure that still characterizes the company today. Since the 1920s, GM has remained divided into five automaking divisions: Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. The five represented very different automobiles aimed at very different markets. GM operated under what Sloan called a “price pyramid,”[iii] so that Cadillac, at the top, had the highest price and the lowest volume and Chevrolet, at the base of the pyramid, had the lowest price and the highest volume. The aim, as Sloan put it, was to manufacture “a car for every purse and purpose.”

Pierre du Pont also succeeded because he was much more than an idle investor. For instance, in 1923, du Pont committed more than a quarter of his GM shares to fund a stock purchase plan for senior GM managers. In Sloan’s words, du Pont was fixed “on creating a partnership relationship between General Motors’ management and itself.” Possibly it was the close relationship between DuPont and GM that prompted antitrust regulators to intervene. In 1957, the Supreme Court forced DuPont to dispose of its stake in GM. The court did not find that DuPont had violated the law; they merely concluded that the potential for abuse existed.

William Taylor, associate editor of the Harvard Business Review, identifies three critical factors in du Pont’s involvement:

First, the size of the investment created a real stake for both sides. Will Durant could not afford to ignore the opinions of a 25 percent owner, and du Pont could not ignore problems with his company’s largest outside investment. Second, there was commitment. Du Pont did not own shares in Ford or in any of GM’s other competitors, so GM could provide him with confidential plans and information without worrying that they would be misused or end up in the hands of rivals. Finally, there was expertise. Pierre du Pont was named chairman of GM’s finance committee in 1917; by 1920, he had a good sense of the company’s operations, people, and strategic blind spots – the hard and soft data that are invisible to most outsiders but are the essence of why big companies function poorly or well.[iv]

A second author, Columbia Law School’s Louis Lowenstein, comments on why the DuPont–General Motors relationship was so unusual.

DuPont’s power at GM was impressive, but there was also a remarkable sense of its responsibilities. Unless GM grew and prospered, there would be no profit. . . . At times the only sensible course, and the one du Pont followed was to commit further resources. . . . In the troubled days after WWI there was pressure to dismember GM and to recoup DuPont’s investment, as part of what now would be called a “restructuring.” DuPont was able to extend itself, partly because it had the wherewithal to do so but more profoundly because from the outset its decision about GM had been as particular and deliberate as it was significant. DuPont understood why it invested in GM, and neither the dramatic downturn of 1920, the predatory pricing by Ford, nor the failures of GM’s management shook that faith. And somehow neither the initial losses nor the later profits ever blurred the separate identity of the two companies. DuPont never contemplated merger, but neither was GM just part of a portfolio that could be dumped at the first hint of a quarterly downturn.[v]

Both these commentators regard the DuPont–GM relationship as a model of “relationship investing,” in which the providers and managers of capital work together to achieve their mutual goals. Indeed, Lowenstein comments dolefully, “It is tempting to think about whether GM would have stumbled so badly in the 1970s and 1980s if the DuPont company had still been there.”

general motors: what went wrong?

The postwar period

In the dazzling firmament of America’s postwar industrial success, there was no brighter star than General Motors. Along with Ford and Chrysler – the “Big Three” – GM rode the coattails of the United States’ spectacular journey to worldwide commercial dominance. The American middle class grew in size and wealth; a network of highways opened up the continent; gas prices remained absurdly low; Americans developed a romance with the road and a love of driving. Under these blissful conditions, Detroit’s automakers captured nearly 90 percent of the North American market, with GM itself responsible for nearly half of all cars bought in the US.

Thanks to Sloan’s legacy, GM was organized to match a person’s progression in car buying. A 16-year old would pick up a cheap but trusty Chevrolet; married with no children, he might trade in for a classier, racier Pontiac; when the kids arrived, he’d need a bigger car to pack in the crew and would aim for maybe an Oldsmobile; when he’d aged a bit, he’d plump for the nice, safe Buick; and if he was old and rich he’d cruise to the country club in a Cadillac. In other words, if a customer bought a Chevy and liked it, he remained locked into buying GM for life.

In 1952, GM’s president, Charlie Wilson, testified to the Armed Services Committee that: “What’s good for the country is good for General Motors, and what’s good for General Motors is good for the country.” His statement captured the arrogance of the largest corporation on earth. Indeed, GM’s greatest fear in the 1950s and 1960s was to keep its market share down so as to avoid a possible antitrust suit from the federal government.

Its dominance continued into the 1970s. In 1972, GM was the fourth largest company on earth with a stock market valuation of over $23 billion – nearly four times the value of Ford.

In two short decades, this bright picture dimmed. In 1992, GM was the fortieth largest company in the world, its stock market valuation only $22 billion – less than it had been 20 years earlier. Its market share had plummeted to less than 35 percent, causing GM’s core North American operations to lose $7 billion in 1992 alone.

The scale of GM’s decline became obvious in December 1991, when CEO Robert Stempel announced a huge downsizing. Six assembly plants were earmarked for closure, with 15 other plants to follow by 1995. A total of 74,000 jobs would be lost as a result of the cuts – reducing the GM workforce to half its 1985 size. The layoffs merely worsened GM’s already testy relationship with the United Auto Workers (UAW) union.

At the time of this announcement, GM’s stock traded at a four-year low, about half what the stock was worth in 1965, though the S&P 500 had quadrupled in that period.

In October 1992, the GM board did what no GM board had done since 1921. It pressed for the resignation of the chairman and CEO, Robert Stempel. Stempel, who had only had the helm of GM since August 1990, was pushed out for moving too slowly on downsizing the company, streamlining operations and improving efficiency. A new breed of managers took over, their mission to fix General Motors.

In 20 years GM had gone from being a golden corporate success to being what Fortune magazine called a corporate “dinosaur.” What went wrong?

The history of GM is an instructive story in how success can breed failure; how being the biggest and the best can lead to arrogance and an inability to adapt. GM was the premier car company in the world for so long that it failed to see the need for change. The company was so used to being leader that it couldn’t contemplate following others. It was this mindset, this overwhelming belief that it was GM’s divine right to be the most successful automobile company on earth, that condemned the company to two decades of disaster. When GM did finally see the need to adapt, it did so with wild ineptitude, spending tens of billions in the 1980s for little reward.

As we review what went wrong at GM, and why, keep in mind our corporate “tripod” of shareholders, directors, and management.

Which group should have been responsible for seeing that GM adapted to a new competitive environment? All three?

Or some other group, less intimately involved in GM and less beholden to its culture: suppliers, consumers, employees, the government

Given that it is in none of these groups’ interests to see GM fail, and given the company’s enormous resources to compete, why did no one (or at least no one in a position to do anything about it) see GM’s decline coming?

And why couldn’t anyone head the crisis off before billions of dollars were wasted and tens of thousands of jobs lost?

GM was not alone in its failure to reposition itself for a new competitive environment. Ford displayed equal hubris in the face of the Japanese and suffered just as badly; Chrysler was only saved from bankruptcy by the intervention of billions of dollars in federal loan guarantees. However, both companies, being smaller, were able to respond to their respective crises with more rapidity. GM, by contrast, became living proof of the old boxing maxim: the bigger they are, the harder they fall.

The GM “culture”

GM was such a powerful, dominant company that its cars, and its name, were an American institution. The trouble was, the company was managed like an institution. It was highly risk-averse, chronically slow to change, endlessly bur-eaucratic, and contemptuous of competition.

GM employees were expected to display unwavering loyalty to the GM organization, subsuming their personality to that of the corporate giant. Employees were expected to be “team players,” meaning that they never questioned a decision, never contradicted the boss, and conformed with the corporate stereo-type. One author describes a GM employee driving 40 miles each morning to pick up his superior’s newspaper, and saying he didn’t mind the chore because one day he would be promoted and have someone perform the task for him.[vi] A second writer tells the story of a GM executive who required his morning orange juice to be a certain temperature, so each day an underling would check the glass of juice with a thermometer.[vii] Risk and creativity were not in the GM lexicon. A memo circulated by a senior GM executive in 1988 said, “Our culture discourages frank and open debate. The rank and file of GM personnel perceive that management does not receive bad news well.”[viii] Automotive analyst and author Maryann Keller quotes one executive who told her, “If you raised a problem, you got labled as “negative,” not a team player. If you wanted to rise in the company, you kept your mouth shut and said yes to everything.” Keller asserts that the guiding principle of GM corporate life was, “Above all, be loyal to your superior’s agenda.”[ix] This culture was matched by the decision-making process. Decisions were shuttled higher and higher up a hierarchy of committees so that if anything went wrong, nobody would ever take the blame. Orders flowed from the top down; ideas seldom percolated up. It was a system in which no one took responsibility for any decision, so no one had any need to be accountable for one. The same 1988 memo pointed out that fewer than 100 salaried workers (out of over 100,000) were dismissed annually for poor performance between 1977 and 1983.[x] Keller points to a 1980s study by the McKinsey management consulting firm that highlighted the accountability problem. The study detailed how an engineer, faced with a defect, couldn’t simply offer a solution to the manufacturer. Rather, “you have to produce 50,000 studies to show that it’s a better solution, then you have to go through 10 different committees to have it approved.”[xi] The stultifying bureaucracy resulted from the fact that GM concentrated more on “making the numbers” than on making cars. This derived from the dominance of the financial wing of the company.

From 1958 and the appointment of Frederick G. Donner as chairman, GM was headed by a succession of finance men – “bean counters” as opposed to “car guys.” The understanding was that an engineer, left to his own devices, would spend limitless amounts of money in pursuit of the ultimate car, and it was important for the financial people to keep the engineers in check.

The rule of the finance department was that no idea was worth introducing if it didn’t directly boost the bottom line. In the 1950s, GM couldn’t afford to raise its sales – to do so would be to arouse the ire of federal antitrust regulators. Instead, GM sought to increase earnings from the same level of sales by cutting costs and thus raising the profit margin per car. Corporate heroes were those who could shave a dollar from a manufacturing process. GM never chased grand new ideas because there was no need. When existing car lines were capturing half of the US car market, what was the point of spending millions of dollars developing a different model that might not sell? What was the point of offering seat belts when customers were perfectly ready to buy GM’s cars without them? As one observer notes, “It was much easier for GM to add a $20 piece of chrome or a $5 sports stripe and call the car a “new model” than take a chance with costly new technologies, such as antilock brakes or multivalve engines.”[xii]

GM and quality

GM sold so many cars that there was no reason to slow up assembly lines to improve quality – after all, dealers only complained that they weren’t receiving enough cars, not that the cars being delivered were defective. Again, the pressure was to “make the numbers” and produce the required number of cars. GM’s only worry was whether it could produce enough vehicles to serve its massive market, so cars were subjected only to routine inspections. If a customer bought a dud, he could always send it back.

Shoddy quality was never fixed because bad news never traveled far in the corporation. If too great a percentage of GM cars failed their quality inspection, the standards were simply lowered so that more cars could pass. Keller interviewed one truck executive who learned the hard way. In the late 1960s he reported to the executive committee that few GM trucks lasted even a single year without a breakdown, so poor was manufacturing quality. After the meeting, the boss approached him and said, “We don’t talk about things like that in administrative meetings.”[xiii] This combination of factors meant that Detroit continued to make much the same cars in much the same way year after year. The lack of innovation was startling. This didn’t escape the notice of some GM executives, notably John DeLorean.

My concern was that there hadn’t been an important product innovation in the industry since the automatic transmission and power steering in 1949. That was almost a quarter century of technical hibernation. In the place of product innovation the automobile industry went on a two-decade marketing binge which generally offered up the same old product under the guise of something new and useful. There really was nothing essentially new.[xiv]

The Fourteenth Floor

The “Fourteenth Floor” of General Motors’ Detroit headquarters became the living symbol of GM’s size and dominance. Here was Executive Row, housing the offices of GM’s most senior officers, people who almost invariably had spent their whole working life at GM. Behind two sets of locked glass doors, near the private executive elevator (that ran down to the heated executive garages), and close to the private executive dining rooms, the most vital issues concerning the corporation were decided.

John DeLorean, who quit shortly after being promoted to the Fourteenth Floor, describes how he found himself buried in paperwork, wrapped up in endless committee meetings, and cut off from the business of building automobiles. DeLorean describes one executive meeting (which he says often put a third of attendees to sleep) in which a minor point of compensation was being discussed. Suddenly the chairman, Richard C. Gersternberg, barked out some orders:

“We can’t make a decision on this now. . . . I think we ought to form a task force to look into this and come back with a report in 90 to 120 days. Then we can make a decision.” He then rattled off the members of the task force he was appointing. There was an eerie silence after the chairman spoke. It lasted for what seemed like half a day. The whole room was bewildered but no one had the courage to say why. Finally, Harold G. Warner, the snow-white-haired, kindly executive vice president, who was soon to retire, broke the silence. “Dick this presentation is the result of the task force that you appointed some time ago. Most of the people you just appointed to the new task force are on the old one.”[xv]

Governance at GM: Corvair, Nader, and “Campaign GM”

One episode sums up most of what was wrong with GM. The story concerns the Chevrolet Corvair, built in 1959. Even in the testing stage, Chevrolet’s engineers noted some alarming safety defects, particularly the car’s tendency to spin out of control when taking turns at speed. The president of Chevrolet wished to add a stabilizer bar to the vehicle, at a cost of $15 per car. He was overruled by the finance department, which claimed that the bar was an unnecessary cost. The Corvair rapidly gained a reputation as a lethal vehicle, but rather than admitting to the Corvair’s faults and making changes, GM continued to market the dangerous car. In a sop to the critics, GM spent $1 million on safety studies.

General Motors was subjected to embarrassing congressional hearings led by Senators Abraham Ribicoff and Edward Kennedy. Chairman Frederick Donner was unable to recall GM’s earnings from the year before, and had to ask an aide to come up with the $1.7 billion figure. Kennedy said that $1 million spent on safety out of such enormous profits was a meaningless gesture.

GM’s main nemesis turned out to be a young consumer adocate named Ralph Nader. Nader exposed the safety defects of the Corvair in a book entitled Unsafe At Any Speed. Instead of responding to the allegations, GM assailed Nader. The company hired private investigators to tail Nader, and produce whatever dirt they could. Rumors were spread that the consumer advocate was a homo-sexual and anti-Semitic. Ultimately, GM’s president, James Roche, publicly apologized to Nader and admitted the defects in the Corvair. A stabilizer bar was finally added to the car in 1964, but by then Corvair’s name was already damaged beyond repair.

Nader wasn’t finished with GM however. In 1970 he, along with three other public interest lawyers, set up the Project on Corporate Responsibility to raise public consciousness about corporate behavior. GM was their first target, not only because of Nader’s experience with the company, but because GM was such an obvious epitome of the giant American public corporation.

Originally, “Campaign GM” called for Nader to run as a candidate for the board but Nader declined the offer. Instead, the project submitted shareholder proposals for GM’s 1970 annual shareholders meeting, calling for three reforms: an amendment to the corporate charter stating that GM’s operations would be consistent with “public health, safety and welfare,” the establishment of a shareholder committee on corporate responsibility, and the expansion of the board to allow for three public interest representatives. Within three weeks, six more proposals were added concerning auto safety, pollution control, mass transit, and minority hiring, but the Securities and Exchange Commission (SEC) ultimately permitted all but two to be excluded from the proxy. The remaining two – concerning a shareholder committee and the expansion of the board – were enough to make the 1970 annual meeting a spectacle. Three thousand people attended the May meeting, which turned into a lengthy question-and-answer session regarding GM’s commitment to social issues. Although neither proposal gained 3 percent of the vote, meaning that Campaign GM could not resubmit the proposals the next year, GM did make changes in response to the public pressure. It went on to create a public policy committee and a special committee of scientists to monitor the corporation’s effect on the environment. It also appointed an air pollution expert and its first black director to the board.

In the end, as Campaign GM showed, the company could be moved. The disaster of the Corvair, and the weight of public pressure, were enough to force GM to make a few, mostly token gestures. But Campaign GM took place 11 years after the introduction of the Corvair and seven years after Nader’s book detailing its defects. In the rarefied, conservative atmosphere of the Fourteenth Floor, it took that long for the company to see the need to change. GM refused to be accountable either to a congressional investigation, or to a consumer advocate, and it took years for GM to see the need to be accountable to the market. In the 1980s, as we shall see, this mindset was critical in causing GM’s decline.

The point is well made by automotive journalist and author Doron Levin, in his account of the Corvair episode:

The company had failed to appreciate its impact on, and its duties to, society. Instead of perceiving Nader’s activism as a symbolic warning to heed public sensibilities, GM was confident he was an isolated nuisance. GM clung to the outdated notion that it was powerful enough to create its own social and economic landscape.[xvi]

New trends: efficiency, quality, safety, the Japanese

At the peak of GM’s power – in the 1950s and 1960s – Americans liked their cars big and showy. Power was vital, fuel efficiency irrelevant. When the Japanese showed up in the late 1960s and early 1970s, with their small, non gas-guzzling vehicles – “shitboxes,” as they were known in Detroit – GM paid no attention. If there was a market in America for small cars, ran the reasoning, GM would already have cornered it. Rather, the company pledged to continue the lines that had always made money, the big, wide and heavy cars that could carry a family in comfort and the rich in luxury.

General Motors could be forgiven for its lack of vision in 1970. It was quite true that small cars did not sell in America, and the Japanese competition at this time was terrible, producing badly designed, badly made cars. But by 1980, Japan was making good small cars and Americans were buying them. GM’s market share dwindled year after year as a result. This was not just a failure to guess where the new markets might be, it was a failure to adapt to a current market that was right before GM’s eyes.

In retrospect, we can identify the 1970s as the decade when the American car industry should have changed its ways. Three factors combined to reshape the competitive environment:

ever-improving Japanese quality and design;

two oil crises that drove up the price of gas; and

federal regulations demanding better fuel efficiency and safety standards.

Of course these factors were related. It was the oil crises that awoke the federal government to the need for fuel efficiency; and it was Detroit’s reluctance to treat quality and reliability as important issues that allowed the Japanese a huge head-start in that field.

In 1973, in response to America’s support for Israel in the Yom Kippur war, the Organization of Petroleum Exporting Countries (OPEC) agreed to impose an oil embargo on the West. As America and Europe scrambled to step up the search for oil in the North Sea, Alaska, and the Gulf of Mexico, Western leaders also looked for ways to avoid being put at the mercy of OPEC again. One solution was to use less oil.

The oil crisis of 1973 – or the energy crisis as it came to be called – came as a particular shock to Americans, who were used to paying about 30 cents a gallon for gas. Overnight, it was a dollar. People found themselves lining up all day for a commodity that had been almost as readily available as water. Suddenly, driving a car that only ran ten miles to the gallon was no longer affordable. The move to smaller, lighter, more efficient cars was lightening fast. There was one group in a position to respond: the Japanese.

At the time of the 1973 oil crisis, Japanese cars accounted for about 10 percent of the car market, compared with the 80 percent share commanded by the Big Three. Japanese automakers were still finding their feet in the early 1970s; they were not proficient in body design or engine production. Moreover, they had little idea about the market, producing cars in designs and colors that failed to appeal to Americans.

But the Japanese response time was incredibly quick. Sensing a massive market for smaller, cheaper cars, Toyota and Honda worked at producing just that. They focused on quality, efficiency, and reliability – issues that Detroit, with its massive guaranteed market share, had ignored.

Japanese management practices, in contrast to GM’s bureaucracy, were lean and highly flexible. They had none of the burdensome committee structures that crippled Detroit, none of the rigid hierarchies, and none of the acrimonious labor relations. The result was an altogether more efficient operation. As late as 1981, a GM internal study found that the Japanese could build a car for $1,800 less than it cost GM.

The Japanese were not burdened by GM’s institutional culture. Rather, the Japanese stressed innovation and customer service. Manufacturers and designers, labor and management, worked in teams with the lowliest assembly-line workers, all seeking ways to make jobs easier and products better. At the same time, Japanese firms guaranteed their workers employment for life, engendering a loyalty to the company that was matched only by a loyalty to the customer. As a result, quality was built into the system. In Detroit, cars were pulled from the assembly line to correct defects or were sent to the market on the basis that discontented customers could send them back. In Japan, cars were built right first time. Even in 1993, Japanese companies manufactured nine out of the top ten quality-ranked vehicles, according to one survey.[xvii] Japan was able to respond to consumer trends in a fraction of the time that it took the Big Three. As Americans moved toward smaller cars, the Japanese were there. As customers increasingly sought quality and reliability, the Japanese were there again. Even today, Japanese automakers are able to get a new model to the market a year quicker than their American counterparts. In the 1970s, this meant that Japan was able to get a massive head start in the race to build small, efficient cars.

A second oil crisis in 1979, prompted by the overthrow of the Shah of Iran, merely accelerated the Japanese invasion. By 1980, the Japanese had raised their market share to 20 percent, double what it had been in 1970. In less than a decade, the Japanese had made quantum leaps in design and styling, and the small car market had become far more than a niche.

But GM continued to underestimate the threat. As Keller comments, “GM never understood their foreign competitors. They were viewed as opportunists who got lucky during the oil crises.”[xviii] As Detroit continued to ignore the Japanese, so too did it ignore the trends that were making the Japanese successful. Partly, the problem lay with the federal government. Following the 1973 oil shock, the government initiated a host of regulations concerning fuel efficiency, clean air standards, and safety. Detroit’s designers found themselves trying to develop cars that matched these standards. The Japanese, already ahead in the efficiency game, concentrated on quality and customer satisfaction.

The Big Three’s response to new federal regulations was to lobby for loopholes. In 1975, Congress passed the Corporate Average Fuel Economy (CAFE) law, which established increasingly stringent fuel efficiency standards for US cars. The intention was to double car mileage by 1985. The law encouraged smaller cars, since automakers were bound only by the average that their fleet recorded – larger cars could under-perform the CAFE standard as long as smaller cars could make up the difference. The CAFE law grew progressively weaker as congress approved loophole after loophole. By 1986, GM had failed to meet the standards for four years in a row, but had paid no fines thanks to laws lowering the mileage requirements, or approving new methods of measurement that allowed GM to record higher fuel efficiency. In 1986, an attorney for Ralph Nader’s Public Citizen consumer group told the Wall Street Journal, “If all the [CAFE] statute is designed to do is ratify what GM and Ford want to do on their own, there isn’t much point to the statute.”[xix] Detroit also resisted efforts to improve safety standards. In April 1971, listening devices in the White House (made famous by the Watergate scandal) recorded Ford executive Lee Iacocca telling Richard Nixon that a federal law mandating airbags would cost US automakers crippling sums of money. He told Nixon that airbags represented a possible $4 billion annual cost to Ford, “and you can see that safety has really killed all of our business.” Iacocca’s pitch was successful – Nixon delayed federal laws mandating airbags.

Safety features such as airbags actually represented a competitive advantage for the Big Three – they were way ahead of the Japanese on safety technology. But they failed to anticipate increasing consumer demand for safety features, stressing the paramount importance of protecting the earnings column.[xx]

Detroit responded to new CAFE and safety standards by arguing that efficiency and safety standards were low among consumers’ priorities compared to comfort and reliability. The automakers argued that they would provide more efficient engines and safety features just as soon as buyers demanded them. As we shall see in our discussion of the import restraints of the 1980s, the Big Three were very quick to abandon this free market position.

As small cars became increasingly popular, GM tried half-heartedly to compete. In 1970, it introduced its “import buster,” the Vega. The car was a lemon. It failed to meet any of its projections for weight, length, or price, and arrived at the market costing $300 more than the VW Bug. It was also riddled with mech-anical defects. The car was outsold by the Ford Pinto in its first year, and was cancelled the next in the wake of a violent strike at the Vega plant. GM didn’t mind. Executives resisted the opportunity to improve the Vega, believing that its failure merely proved that the small car market was ephemeral and a distraction.

By the late 1970s, when it was clear that small cars had arrived to stay, GM was still confident of its leadership. In a momentous, high-cost decision, the company planned to shift away from heavy, gas-guzzling rear-wheel drive cars to more efficient front-wheel versions. The generation of “X-cars”, due to hit the streets in 1980, would show that GM’s engineering was still the best there was.

The X-cars were disastrous. GM underestimated the huge changes that were necessary to switch from rear-wheel to front-wheel drives, and failed fully to re-engineer engines and transmissions. The result was that X-cars achieved a reputation of being shoddily made and unreliable. In 1981, GM unveiled the J-car project, another car series that was meant to send the Japanese packing – GM President F. James McDonald called the J-Cars a $5 billion “roll of the dice.”[xxi] The J-cars suffered from the same cost-cuttting problems as the X-cars, borrowing unsuitable engine and transmission designs from earlier models. The result was that the J-cars like the X-cars were panned both by the automotive press and the buying public. Indeed in 1981–82, GM recalled more cars than it produced.[xxii] The X-cars also looked bad – hardly surprising since GM didn’t bother with consumer market research until 1985. By contrast, the Japanese had made huge strides in styling, creating glossy paints and friendly interiors with appealing trim. They had developed features like internal trunk and gas cap releases, things that appealed to the driver as a “user.” Detroit was still relying on decorative gimmicks like a chrome strip.[xxiii]

The 1980s

The X-cars were meant to show the world that GM still led in automotive engineering, but they only showed how out of touch the automaker had become. In 1980, GM lost over $700 million, its first loss since 1921, as its sales dropped 26 percent. But the scale of GM’s problems was overshadowed by the crises threatening Ford and Chrysler.

In 1979, Ford recorded a $1.5 billion loss, followed by losses totaling a further $1.75 billion over the next two years. This volume of red ink was almost enough to leave Ford bankrupt. 1979 was an even worse year for Chrysler. Iacocca, traveling to Washington as Chrysler’s new CEO, told the federal government that without a massive loan guarantee, the company would fold with the loss of tens of thousands of jobs. The next year, 1980, the government approved $1.5 billion in loan guarantees. The loans covered Chrysler’s $1.7 billion loss, and allowed the company to survive.

It wasn’t just Chrysler that received help from the government. All three members of the Detroit trio joined to lobby for protection from the Japanese. In other words, Detroit sought to keep the Japanese out of the United States rather than compete with them.

In 1981, after months of negotiation with both the UAW and the federal gov-ernment, Japan agreed voluntarily to limit the number of cars it would ship to the US each year. The first year’s limit was set at 1.68 million vehicles – significantly reducing the Japanese threat. Detroit had negotiated itself a breathing space; indeed the uncompetitive market allowed the Big Three to enjoy record profits over the next few years. It was a golden opportunity to take charge of the auto market, improve efficiency and quality to Japanese levels, and compete fairly and squarely with the Japanese. But the hard-won lull proved brief – especially for GM.

Ford and Chrysler’s perilously close journey to the brink of collapse forced them to rethink. Clearly, they could no longer run their companies as they once had – the world had moved, and they had to move too if they were to survive. As a result, the two automakers showed some brave developments through the decade: Chrysler with the reintroduction of the convertible and in the production of minivans, Ford with aerodynamic new design. As a result, Ford and Chrysler made it through the 1980s. Both companies had mixed results through the decade, but both were vastly better positioned to compete in 1990 than they had been ten years earlier.

GM was not driven to change by the same fiscal crises that beset its Detroit counterparts. In 1980, GM was still a massively wealthy corporation, protected by its size and its financial strength. Not that GM went untouched by the changes made at Ford and Chrysler; it too saw the need to upgrade and compete. In 1981, GM appointed a new chairman and CEO who was determined to drag GM into the twenty-first century – Roger Bonham Smith.

The Smith era

Roger Smith had a consuming vision of the GM of the future. He saw the car as not just a mechanical object, but an electromechanical one, in which on-board computers and circuitry were as important as the actual engine. He saw cars manufactured in “lights out” factories, where the only employees were people supervising the robots and computers. Smith also envisioned a world in which high-tech smoothed the process of buying a car. The customer would reel off his order – tinted glass, automatic transmission, color blue, power windows – to a salesman who would tap the particulars into a computer. The information would be relayed to factory robots that could custom-build every vehicle. The consumer would no longer be forced to chose between competing models, since every car could be tailor made.

Clearly, Smith was thinking long, long term. He had a vision of the industry as it might develop in the 21st century. But he was determined to put GM on the fast track toward that future, and to block the Japanese from using their superiority in microelectronics to dominate the car market as they had the consumer electronics market. With a cast-iron balance sheet and mountains of cash, Smith was determined to remake GM into the world’s strongest automaker.

Over the next decade, GM spent nearly $90 billion reforming itself. By most accounts, this money was all but wasted. GM lost market share throughout the 1980s, and became a high cost, inefficient producer. The company’s continued decline set the scene for the massive downsizing of 1991, and the ouster of Robert Stempel in 1992.

Why did the 1980s prove so disastrous for GM? An examination of Smith’s strategy reveals three main themes:

reforming GM’s bureaucracy;

purchasing advanced technology;

attempting to instill an entrepreneurial spirit in the company.

Organizational reform

The CEO, Roger Smith, was acutely aware of GM’s bloated, blundering org-anization. He knew that GM would have to become leaner and meaner if it wished to compete. In 1984, Smith set out to reorganize totally the outdated GM structure.

Through the 1960s, as the men from finance had increased their control over the separate divisions, GM had become more centralized. Alfred Sloan’s rule of “centralized policy and decentralized administration” was being eroded by the demands from the Fourteenth Floor. This problem was compounded in the 1970s by the onslaught of federal efficiency and safety regulations that limited design possibilities.

Also, all car bodies were made by a single division – Fisher Body – and assembled by another – GM Assembly. These two divisions were able to impose their own authority over the designers and engineers at Chevy and Pontiac, etc. The result was that Sloan’s structure of five semi-autonomous divisions had become an anachronism. The extent of the problem became apparent during the 1970s, when GM experimented with “badge engineering.” Under this scheme, divisions shared as many parts as possible to keep costs down, while small stylistic changes were meant to identify a particular car as a Pontiac or an Oldsmobile. “Badge engineering” was not a success since it resulted in cars that looked too much alike.

But although GM was becoming increasingly centralized, each division maintained its own design and marketing operations, so that resources were duplicated across GM. The company was organized the wrong way round – several design centers produced a range of similar cars.

Smith wished to accomplish two goals: decentralize authority back to the manufacturing divisions and streamline the company’s resources so that the divisions didn’t duplicate each other’s work.

Smith reorganized GM into two main groups. Chevrolet-Pontiac-Canada (CPC) would design, manufacture and market small cars. Buick-Oldsmobile-Cadillac (BOC) would take charge of the big ones. The regrouping eliminated two whole divisions – Fisher Body and GM Assembly – in a move that eliminated thousands of jobs and created thousands of others. It was a wholesale shift of personnel in which reporting structures were realigned and channels of communication redirected. The reorganization might have been a good idea in theory, but in practice it created chaos. As Fortune put it, “The shakeup froze GM in its tracks for 18 months.”[xxiv] The problem was that while the old structure had been dismantled, a new structure had not been constructed in its place. The result was an organization in which no one knew who was responsible for what. Suppliers complained that they could never find the right representative, or when they did, he or she soon changed jobs. In the mêlée, new layers of management were created to try and sort out the mess. Indeed, CPC wound up adding 8,000 people following the restructuring.

In 1985, CPC produced 3.5 million cars a year – roughly the same as Toyota. But CPC employed 160,000 people in contrast to Toyota’s 60,000.

General Motors became more, not less, inefficient, causing more people to be hired. In 1983, the total GM workforce was 691,000. By 1985, it had climbed to 811,000.

The confusion led to chaos in GM’s basic manufacturing. In one absurd instance, it became efficient for a Chevrolet plant to build Cadillacs, while Buick assembled Pontiacs. One GM observer told Fortune that GM started producing 17 ignition systems where three would have been enough, and 40 types of catalytic converters instead of four.[xxv] Even as late as 1992, GM produced more than a dozen separate caps for windshield washer fluid bottles![xxvi] Smith’s reorganization seemed to have exactly the wrong effect. Rather than chasing the Japanese dream of leanness and efficiency, the plan had made GM more confused and cumbersome.

GM-10

The failure of the reorganization was most acutely felt in Smith’s other big shake-up, the GM-10 program. One academic called GM-10 “the biggest catastrophe in American industrial history.”[xxvii]

GM-10’s aim, like that of the 1984 reorganization, was to streamline the resources of the five divisions to create a consistent, non-duplicative car line. Starting in 1982, GM set out to replace all existing midsize cars produced by Chevrolet, Pontiac, Oldsmobile, and Buick. Under GM-10, each division would manufacture a coupe, a sedan, and a station wagon. The plan called for seven plants, each to assemble a quarter of a million of the new cars, which would account for 21 percent of the US car market – a bigger market share than Ford’s. According to Fortune, “It would be the largest new-model program ever, the ultimate expression of GM’s ability to capitalize on its enormous economies of scale. But GM couldn’t pull it off. The world’s largest corporation choked.”[xxviii] The 1984 reorganization played havoc with the management of GM-10: people working on the project were moved; responsibilities shifted or were left undefined; the program manager in charge of GM-10 was replaced, as was his successor; responsibility for the program was moved to CPC; finally, and most gallingly, GM was forced to change the styling of GM-10 cars so they didn’t appear to be replicas of the Ford Taurus, introduced in 1986.[xxix] As GM-10 suffered setbck after setback, GM pulled back from the grand vision that had initiated the program. First, GM downsized the project, dropping the station wagon and cutting back the plants involved from seven to four. Then GM found it couldn’t afford to produce all eight GM-10 cars simultaneously, so it rolled the cars out to market over two years, two-doors before four-doors. But even in this, GM guessed wrong. Baby boomers who wanted coupes in 1980 now wanted family-size sedans. Ford, for instance, never introduced a two-door Taurus, yet in 1988, GM was rolling out four brand new two-door coupes.[xxx] In 1990, eight years after the GM-10 program was launched, the final cars hit the showrooms. They were a disaster. In 1989, GM lost over $2,000 on every GM-10 car it produced. In 1979, Oldsmobile had sold 518,000 models of a car, scheduled for replacement under the GM-10 program. Twelve years later, in 1991, Oldsmobile sold only 87,500 models of the new GM-10 version.[xxxi] When asked by Fortune why GM-10 was such a catastrophe, Roger Smith replied, “I don’t know. It’s a mysterious thing.”[xxxii]

Look-alikes

Other errors compounded the manufacturing problems. In attempting to unify the disparate sections of the five divisions, GM endeavored to create a corporate “look” so that consumers could identify a GM vehicle at a glance. GM took this plan too far and created a line of identical-looking cars. GM shrank its luxury cars to such an extent that they no longer looked different from their cheaper counterparts – a $9,000 Pontiac ended up looking similar to $25,000 Cadillac.

The results were disastrous for GM’s luxury end, traditionally the company’s most profitable business. GM resorted to cosmetic changes, such as adding a three-inch fender extension to one Cadillac model to make it appear longer. The irony was plain to all. Once, GM had cornered the large car market. Indeed, during the 1970s it seemed that those were the only cars GM made well; now the company couldn’t even seem to do that right.

Purchase of new technology

If there is one characteristic of Roger Smith that came to dominate his tenure as chairman, it was his love of technology. To Smith, GM’s future lay with hi-tech, and he was determined that GM should be the leader. In his ten-year tenure as CEO, Smith spent over $50 billion on technology projects. As Bob Eaton, chief of GM’s advanced engineering, put it, “When you told Roger about new technology, he’d get excited and ask, ‘Where do I sign?’”[xxxiii]

The list of GM’s high-technology projects through the 1980s is a long one:

When Roger Smith was appointed chairman, GM had 300 robots. Smith made a pledge to acquire 14,000 by 1990.[xxxiv] To fulfill this promise, Smith engaged in a 1981 joint venture with the Japanese robot manufacturer, Fujitsu-Fanuc. GMF Robotics would build robots for the US market, with 70 percent of the output earmarked for GM. Via this joint venture, GM became the largest manufacturer of robots in the world.

Detroit also poured money into an acquisition binge of small-time European car manufacturers. GM bought 48 percent of Lotus for $20 million and half of Saab for $600 million. The hope was that GM could exploit the advanced engineering of these companies.

In 1983, Smith unveiled Saturn, the “car of the future.” The plan was to reinvent the way GM made small and midsized cars. Saturn would be built in new plants, employing the newest technology and the most productive management practices, and sold in stand-alone showrooms. Quality would be the watchword of the new vehicles. Saturn held out the promise that GM could manufacture small cars as well as the Japanese.

Smith also spent money to learn directly from the Japanese. In 1983 he formed the New United Motor Manufacturing Inc. (NUMMI), a joint venture with Toyota. NUMMI was set up in an idle GM factory in Fremont, California, and set out to build Chevy Novas, using American labor and Japanese management.

In 1985, GM offered $5.2 billion to purchase Hughes Aircraft, an aerospace manufacturer. Smith hoped that Hughes’s space-age engineering could be used to juice up GM’s cars.

In 1984, GM bought Electronic Data Systems (EDS) for $2.55 billion. The Texas concern, headed by Ross Perot, was fully bought out by GM, yet remained independent within the company, trading under a separate GM “E” stock. Smith hoped that EDS would speed up GM’s huge data processing operation, and put GM on the cutting edge of information technology. The purchase of EDS made GM the world’s largest data processing company.

Smith didn’t just pursue hi-tech. GM bought two major mortgage companies that overnight turned GM into America’s largest home-mortgage holder.

Smith’s plan was to use technology to make GM responsive to niche markets. Rather than employing a blanket strategy, in which GM produced “a car for every purse and purpose,” Smith intended GM to cover niches as they appeared. As consumer trends developed, GM would respond, bringing the right car rapidly to the market.

The high-technology dream never materialized; nor did Smith’s “rapid response” to niche markets. GM was so big that scale economies didn’t kick in until large numbers of cars were sold. GM needed to sell over 100,000 cars of a new model to make its development profitable. The Japanese made money selling models in volumes of 40,000 or less.

Nor could GM speed up its production time. The C-car line, due to hit the showrooms in the fall of 1984, wasn’t ready until December 1985. Other lines failed to satisfy their target markets. A good example concerns the Pontiac Fiero, a zippy two-door sports car, aimed particularly at young females. GM spotted the market and dominated it, selling over 100,000 Fieros in both 1984 and 1985. Encouraged by initial sales, GM continued to manufacture and market the car as if there were no tomorrow – and no threat of competition. Both came, and GM was not ready to face either one. For instance, during Fiero’s development, to keep costs down, GM had eliminated power steering. As it turned out, however, power steering became a popular feature with women since it makes a car so much easier to park. The Japanese picked up on the trend, GM didn’t. Toyota shipped its MR-2 with retrofitted power steering, and ate into the Fiero’s market. As Fiero’s sales sunk, so GM found it couldn’t afford to compete in the market. The MR-2, and Mazda’s Miata are still on sale today, unlike the Fiero, canceled in 1988.

General Motors found that the new technology created more problems than it solved. Typical of the problems were those experienced by the Hamtranck plant in Michigan. The plant was opened in 1985–86 at a cost of $600 million, and was to be a showcase for GM’s brave new manufacturing world. Hamtranck boasted nearly 2,000 computers on its assembly line, requiring 400 workers to be trained for a year before the plant opened. Doron Levin tells of the travails experienced at the plant when it finally began operations:

GM engineers were having a devil of a time de-bugging the hundreds of advanced machines and laser-guided devices. No sooner did the robots in the body shop weld sheet metal properly than the new modular painting robots commenced spraying one another. . . . If GM had tried to introduce one or two glitzy automation projects instead of dozens and dozens, the [Hamtranck] plant might have opened smoothly. GM’s software and engineering expertise, under extreme deadline pressure, just wasn’t sufficient for the job.[xxxv]

Despite the advanced machinery, Hamtranck never operated at more than 50 percent capacity. The Wall Street Journal commented in 1986 that the plant “instead of a showcase, looks more like a basket case.” Just 25 miles away, Mazda opened its own plant for a quarter of the cost of Hamtranck. With 1,500 fewer employees, the Mazda plant made just as many cars, of better quality.

The results of the technology improvements didn’t justify their huge cost. In a 1986 management conference report, executive vice-president of finance, F. Alan Smith pointed out that GM projected to spend $34.7 billion between 1986 and 1989. That sum, he argued, was equal to the total market capitalization of Nissan and Toyota combined. Theoretically, GM could buy out both companies, increasing its worldwide market share to 40 percent. What was GM’s $34 billion going to buy them that would generate that kind of sales increase?

Deteriorating results

In actual fact, GM became only less competitive as the spending continued. Alan Smith’s report pointed out the nasty numbers. In 1983, GM had the highest operating margins in the game – it earned 2 percent more on sales than either Ford or Chrysler. By 1985, those two companies were both 3 percent more efficient.[xxxvi] Over the same two-year period, GM’s sales increased 22 percent, though earnings declined 35 percent. And whereas, in 1980, GM could produce a car for $300 less than it cost Ford or Chrysler, by 1986, GM’s costs were $300 more than both.[xxxvii]

GM lagged its crosstown rivals by other measures.

In 1985, GM’s profit margin was 4.1 percent, compared to 7.7 percent for Chrysler.

An investment in GM 1983–85 returned 16.2 percent, compared to 22.9 percent in Ford over the same period.

According to GM’s calculations it took the company 35 hours to assemble the average GM-10 car, compared with the 18 hours it took Ford workers to build a Taurus.[xxxviii] In 1985, GM recorded 12 vehicles produced per employee, compared with 18 for both Ford and Chrysler.

In 1986, GM achieved an annual revenue of $100 billion. Yet in the same year, the company earned less money than its smaller rival, Ford.

In 1986, in a booming economy that produced record auto sales, GM lost money.

Market share continued its depressing downward spiral: from 44.6 percent in 1984 to 42.7 percent in 1985 to 41.2 percent in 1986. Each lost percentage point represented about $1 billion in annual revenue, and 6,000 jobs at GM and its suppliers.

In 1986, the chairman of the Chrysler Motors unit of Chrysler told the Wall Street Journal, “There was a day when the gorilla said ‘jump’ and you jumped, because GM was the pricing leader and the styling leader. They’ve lost that. They aren’t the low-cost producer. The industry no longer marches to their tune.”[xxxix] GM said that the poor results could be expected as a result of its reorganization, and predicted rapid recovery. In 1987 there could be no such complacency.

Market share plummeted nearly five points to 36.6 percent.

Oldsmobile alone sold nearly 400,000 fewer cars in 1987 than it had the year before.

The skid resulted from a combination of problems:

GM’s costs were still huge. GM’s production cost of the 1985 S-car line was twice that of Isuzu for a similar model.

Those who had bought GM in 1981–82 and had been disappointed by the quality and reliability of the X-cars had not come back to GM next time round.

GM’s shrunken Cadillacs, and the “look-alike” problem damaged the higher-end divisions.

GM’s smaller line of A-cars came to the market in 1985 just as gas prices headed downwards again, revitalizing the large car market. GM continued to market its older models, damaging sales of the new models and causing confusion among customers.

GM lagged the competition in styling. The 1985 Ford Taurus revolutionized the sales of “aero” look cars, even as GM was still producing boxy, square-shouldered vehicles. Meanwhile, Chrysler took a huge head start in the minivan market.

Smith wanted GM to develop cars more quickly, but in the effort to rush new models to the market, it failed to concentrate on quality. Most GM models produced through the 1980s weren’t as good as the vehicles they replaced.

GM still retained the production capacity to serve a 50 percent share of the US market, despite the fact that its share was less than 40 percent and slipping. The result was that GM operated fearfully under capacity, with six car factories even running at half-capacity. The fixed costs of running auto plants at anything less than full capacity were huge.

GM remained stuck in the past in other ways, as discussed in a 1986 Wall Street Journal report. The article discussed a 53-year-old GM plant in Ohio that turned out 19,000 car brakes daily, shipping the parts for inclusion in every GM car from Chevy to Cadillac. The plant typified the massive vertical integration that had once made GM the most powerful company on earth. But in 1986, GM spent 15 percent more on manufacturing its own brake parts than it would cost to buy them from an outside supplier. Ford and Chrysler, by contrast, purchased their brakes from suppliers as far away as Brazil, and saved money.[xl]

Saturn

Like Smith’s other projects, Saturn was hugely ambitious. Saturn must sell 500,000 cars a year over the long haul to be profitable. That’s as much as Nissan sells in the US each year. A Wall Street Journal article explained how Saturn’s ambi-tion may be its downfall:

Everything at Saturn is new: the car, the plant, the workforce, the dealer network and the manufacturing process. Not even Toyota Motor Corp., everyone’s candidate for the world’s best automarker, tackles more than two new items on any single project.[xli]

The very size of the undertaking meant that GM was unable to complete it cheaply. Moreover, it did not get as much “bang for the buck” as did its chief competitor, Honda.[xlii]

Honda’s US factories cost $600 million, employed 3,000 workers, and turned out 300,000 cars a year.

GM’s new Saturn plant cost $5 billion, employed 6,000 workers and would turn out, at most, 500,000 cars a year.[xliii]

Saturn was launched in the fall of 1990 in a $100 million blitz of advertising and publicity. The opening months proved far from auspicious . . .

GM hoped Saturn would sell 150,000 in its first year. In the first nine months of production, Saturn built 24,000 cars and sold 15,000 of them.

Six months after opening, Saturn was operating at half-speed, and selling only half of what it produced. One manager told the Wall Street Journal that the plant makes cars at full speed for maybe a few hours, “then we run into a snag.”[xliv]

Despite its emphasis on quality, the division has not delivered. In Saturn’s first months, some 35–40 percent of the car’s plastic panels were sent back with defects.[xlv]

Despite the glitches, Saturn was very popular with its buyers, the only problem being there weren’t very many of them. Saturn opened just as the US was slipping into a recession – inhospitable circumstances for the launching of a new car line. Saturn also proved to be cannibalistic – 41 percent of Saturn owners already owned a GM vehicle.

Japan roars back

Just as GM was making a terrible mess of reinventing itself, the Japanese were plotting their return. Anyone who thought that the import restriction would hold Japan at bay for long was sorely mistaken.

Japan adopted a two-pronged strategy. In the first place, it circumvented the import restrictions by building plants in mainland America rather than shipping them from Japan. In this respect, the voluntary restraint helped the United States – Honda, Toyota, and Nissan invested billions of dollars and created tens of thousands of jobs – but it didn’t help Detroit. The Japanese, more than ever before, were competing in the Big Three’s back yard.

In 1980, Honda announced that it would open its first US assembly plant in Ohio.

In 1986, Toyota opened a factory in Kentucky.

In 1989, Honda opened a second plant, and Subaru and Isuzu announced that they too would open US-based operations.

By 1990, there would be eight Japanese manufacturing plants in the United States. The investments paid off. By 1992, Japan would by assembling 1.4 million cars and trucks on the American mainland. Their lines would include two of the three best-selling vehicles, and five of the top 12. By contrast, GM produced only the fifth best selling vehicle and could only manage four in the top 12.

Secondly, the Japanese targeted the luxury car market. Since they were limited to a number of vehicles they could export, it made sense for the Japanese to export higher-priced vehicles that carried a greater profit margin per car. Hence the arrival of Acura in 1986 and Lexus and Infiniti in 1989. In 1992, these three divisions sold over $3.5 billion worth of automobiles. While this was money made partly at the expense of the leading European luxury car makers – Mercedes, Volvo, BMW and Jaguar – it also heavily dented Cadillac’s performance.

General Motors found it was not merely being outclassed in the small car market, but in the expensive, classier range as well. GM remained dominant in the luxury car market – Cadillac was positioned at first, fourth and seventh in the top ten selling luxury cars in 1992 – but the Japanese had nabbed spots three and six. Japan did not dominate the big car market as it did the small, but it was a serious competitor in a market GM had once owned. All of this contributed to GM’s ever dropping market share.

It was not technology that made the Japanese better competitors, it was superior, participatory management.

Japan’s automarkers made do with five levels of management; GM with 14.

NUMMI, run with GM labor under Toyota managers produced the lowest cost, best quality cars in GM. Yen for dollar, they spent less but received more.

GM’s own quality audit found that the Honda and Nissan plants in the American South produced cars with a fifth as many defects as did GM’s.[xlvi] In other words, the difference between Japanese and American quality was not labor. The Japanese could beat the United States in the United States.

Partly, the Japanese success was encouraged by the US automakers. The voluntary restraint agreement forced the Japanese to raise their prices by as much as $2,000 a vehicle. It presented a perfect opportunity for Detroit to exploit their price advantage and recapture market share. Instead, the Big Three raised their own prices, creating a short-term boom in profits. The VRA merely raised the cost of cars for consumers, and did nothing to restore American competitiveness.

Labor relations

Labor relations had never been good at GM, dating back to violent strikes in Flint, Michigan, in the 1930s. But even as the Japanese showed the way in creating a friendly working environment, relations between GM management and labor grew ever worse.

Seeing the need to cut costs, GM signed a new contract with the UAW in 1982. Management stressed “shared sacrifice” to get through difficult times, and wrung a $2.5 billion concession out of the union, in the form of a freeze of the cost of living adjustment (COLA). The very same day, GM’s proxy statement was mailed to shareholders. One of the items under consideration was a new bonus scheme, awarding 5 million shares to 600 senior executives. In the firestorm of criticism that resulted, Smith cut his own pay, and that of other bonus-eligible executives, by $135 a month – the same deduction as the UAW had agreed to take. The notion that millionaire Roger Smith (who had taken an 18.8 percent rise in base pay the year before) and a $12-an-hour machinist taking the same pay cut entailed “shared sacrifice” was, of course, nonsensical. Smith only fanned the flames of the controversy.

To develop better relations with the UAW, GM began a profit sharing program for blue-collar workers. In 1985, GM workers were paid $384 as part of the program, compared with the $1,200 Ford workers were paid under a similar scheme.

Roger Smith regarded labor as opposition, to be replaced by machines wherever possible. In negotiations with the UAW, Smith said, “Every time you ask for another dollar in wages, a thousand more robots start looking more practical.”[xlvii] In 1986, Smith initiated an aggressive cost cutting drive, which included the closure of 13 plants and 25,000 white-collar layoffs. The next year he promised to cut a further $10 billion out of GM’s costs.

The 1980s: A difficult decade

Clearly, Smith’s strategy failed. GM ended up spending tens of billions of dollars for little or no reward. Despite the high-tech, GM became less, not more, efficient. Its cars found no favor with the public. Its market share dropped. When its competitors burgeoned in a booming auto market, GM lost money.

General Motors suffered throughout the 1980s because it failed to address its basic problems with sufficient alacrity or aggression. The Chrysler and Ford crises, and the relentless Japanese onslaught, should have shown GM that it needed to compete, that it couldn’t take a 50 percent market share for granted any longer. The massive vertical integration that had served GM so well for so long was out of date.

At the time of the voluntary restraint agreement in 1981, the Japanese had shown that they could produce high quality cars in a fraction of the time it took GM. To stay in step, GM needed to show that it too could efficiently produce a well made car. Given the breathing space afforded by the import restraint, GM could have committed itself to streamlining operations, and cutting away the layers of the organization that stood between the makers of the automobile and their customers.

The import agreement brought record profits to the Big Three. But the windfall was wasted. GM didn’t plough the money back into its core operations, upgrading their operations to Japanese standards. GM didn’t reinvest the money in ways that would lower the cost, and improve the quality of cars that went to the showrooms. GM failed in the 1980s because it tried to solve problems without addressing their fundamental, underlying causes. As Keller comments, “Acquiring EDS and Hughes was like the four-hundred-pound woman coloring her hair and doing her nails. It wasn’t tackling the real problem.”[xlviii] Its problem was not that it was short of technology; it was that it was a badly organized, insular, backward-looking, and inefficient producer of motor vehicles. Smith’s obsession with technology made no impact on GM’s ability to compete.

Its failure was also a failure of leadership. Smith failed to realize that GM’s most important commodity was its people. GM could not become a twenty-first century automaker without the company’s employees – its engineers, machinists, and assembly-line workers – coming along for the ride. But Smith treated labor as a problem to be limited, not as a resource to be nurtured. Indeed, with all his talk of a “lights out” factory and robot automation, one could be forgiven for thinking that Smith wanted to dispose of labor altogether. How could Smith hope that GM’s employees would pursue his vision, if all it promised them was the sack?

And the board played on . . .

Where was the GM board of directors when Smith’s strategy started to come apart at the seams in 1986? The answer to this question is important because the ultimate problem – and solution – for GM lay in the realm of corporate governance. It is a truism of the corporate system that management must have sufficient freedom to take risks and experiment. Inevitably, not every risk-taking venture succeeds. Plenty of companies adopt strategies that ultimately prove to be costly mistakes. It is at this point that governance becomes important. It is the board’s job to see that management has adopted a sound strategy and executes it competently; and it is the board’s responsibility to replace management when it fails in these duties. In turn, the board is beholden directly to shareholders, and indirectly to stakeholders such as consumers, suppliers, and employees.

As we saw earlier in the discussion of the Corvair episode, GM did not appreciate outside critics. This same view dominated board–management relations through the 1980s. As Fortune put it:

Roger Smith kept the board on a very short leash. He withheld key financial data and budget allocation proposals until the day before meetings and sometimes distributed them minutes before the participants convened. The monthly sessions were rigidly structured and Smith adjourned them promptly at five minutes to noon, leaving little room for discussion. Circumstances and personality enabled Roger Smith to exercise his iron control. Quick to anger, he was intolerant of criticism. Few directors had the ability or desire to take him on.[xlix]

One outside director told the Wall Street Journal that board meetings “were like ceremonial events, with no real information.”[l]

Smith was able to exert control via the board committees. Increasingly, the full board became just a ratifying council for the work of the various committees. This allowed Smith to keep loyalists on key committees. The makeup of the board allowed Smith to exercise such control. In 1989, three members of the board (not including Smith) were GM executives who reported directly to Smith. Among the 11 non-executive directors, four had little or no business experience – Anne Armstrong, former ambassador to the Court of St James; Thomas E. Everhart and Marvin L. Goldberger, both academics; and the Reverend Leon H. Sullivan. Of the eight remaining directors, two were retired and a third ran GM’s chief Detroit bank.

The non-executive directors were paid average fees of $45,000 a year and received a new GM car for their own use every quarter. But these material benefits paled in comparison to the prestige conveyed by sitting on the board of General Motors. Doron Levin speculates on the motivations of one outside director, Edmund T. Pratt, chairman emeritus of Pfizer Inc.:

Ed Pratt had served on numerous corporate boards of directors. None of the posts, including his chairmanship of Pfizer, one of the nation’s leading pharmaceutical firms, carried as much prestige or clout as his GM director’s seat. In Pratt’s eyes, GM was an American institution, the country’s dominant single business force. Hell, GM was America! For a businessman such as himself . . . association with the nation’s premier corporation was an immense honor.[li]

But the honor he felt belonging to the GM board did not inspire Pratt to commit much personal wealth to the company. In 1988, Pratt owned 100 GM shares, despite being on the board for 11 years. In other words, he had purchased about nine shares each year he was a director. Pratt was not alone. Five other outside directors owned 500 shares, and three owned 200 shares.

This was the group responsible for probing, challenging, and, if necessary, changing Smith’s strategy. Yet, for many critical years it did nothing of the sort. GM’s directors let themselves be browbeaten by the CEO’s personality, and blinded by the honor of serving on the board. They had too much to gain – and too little to lose – from the status quo to shake it up. Thus, the GM story is one not just of management failure, but also of the failure of the board.

In the rarefied atmosphere of the Fourteenth Floor, GM executives were cut off not only from the vast body of GM’s employees but also from the board of directors and the shareholders the board was meant to represent. Management was accountable to no one. The truth of this statement will be made clear when we examine the courtship, brief marriage, and messy divorce between GM and Texas billionaire, and later Presidential candidate, Ross Perot. The Perot episode shows how completely the governance structure had collapsed at GM, and how unwilling the board was to challenge management, no matter what the circumstances.

general motors and ross perot

No one was more frustrated by GM’s hidebound culture than Roger Smith. He was frustrated and confused at his company’s inability to turn its operations around. He felt burdened by GM’s insular, backward-looking culture, and he tried hard to break it. Smith liked to explain his vision in the form of an allegory: A GM manager clung to a tree stump, unwilling to swim across a fast-moving river. Smith’s job, as he saw it, was to convince the manager to let go and swim hard, aiming for some unknown spot on the other side. The tree stump was GM’s old way of doing business, the river was the fast moving marketplace, the unknown place on the opposite shore where the swimmer ended up was GM in the next century. In Smith’s view, GM could no longer cling to the past – it had to swim for it. The question was, how could he persuade GM to let go of the stump?

Smith didn’t believe incremental, evolutionary changes would work. Rather, GM would need to be revolutionized. Programs such as Saturn, NUMMI, and the purchase of Hughes were ways of wrenching GM dramatically from the past and forcing it into the future. Ross Perot and his company, Electronic Data Systems (EDS), seemed to present an ideal opportunity. On the one hand, GM was held back by outmoded data processing and computing methods – how could GM be lean and responsive without modernizing its paper-driven bureaucracy? – and on the other hand, EDS was headed by a feisty, no-nonsense Texan entrepreneur who could lend some zip to GM’s stodgy style. Smith liked successful entrepreneurs; they represented everything that GM wasn’t. That was why Smith wasn’t content just to hire EDS, but rather buy it and make it part of GM. Smith hoped that some of what had made EDS successful would rub off on the GM giant.

Roger Smith and Ross Perot were perfect for each other. Smith sought an aggressive entrepreneur, not beholden to GM and ready to speak his mind. Perot was lured by the challenge of lending his services to such a giant corporation, and, born with a strong patriotic streak, he liked the idea of helping out America’s most established company.

General Motors was assiduous in its pursuit of EDS, seeking to overcome Perot’s reluctance to sell the company he had spent his life building. The essence of the agreement appeared paradoxical: GM would pay $2.55 billion to buy EDS, yet EDS would remain independent inside the parent company, managed by EDS executives, setting its own compensation practices, and answerable only to Roger Smith and the GM board. In other words, within the button-down establishment of GM would exist a group of autonomous, non-conformist, Texan rebels.

The deal worked as follows:

GM issued promissory notes to EDS executives that their new ownership in “E” stock would not be worth less than $125 in seven years – i.e. if, in seven years, “E” traded at only $100, GM would make up the $25 difference. It was a way of guaranteeing EDS officers a wonderful return on their holdings in EDS as well as creating an incentive for them to stay for seven years.

Ross Perot would receive $1 billion for his interest in EDS and 43 percent of the newly created “E” stock. Perot instantly became GM’s largest individual shareholder, and one of the largest overall, owning 0.8 percent of the stock, or 11 million Class E shares. By contrast, Smith had acquired 26,500 GM shares in a 36-year career.

EDS was guaranteed long-term, fixed price contracts for its work on GM. The contracts guaranteed EDS $2.6 billion of new business, a sum that was 33 times EDS’s current earnings.

To merge EDS with GM’s own data-processing operation, 10,000 GM employees would be transferred to EDS.

No sooner had the vows been exchanged than the problems began. The new couple started fighting before the honeymoon had even started. As EDS’s senior executives arrived in Detroit, they were given a glacial reception – indeed, many GM-ers seemed not to have been briefed about EDS’s arrival at all. One account of the merger tells how some senior EDS executives were introduced to Alex Cunningham, executive vice-president of North American operations. Cunning-ham uttered not a word to his visitors before showing them out of his office with the words, “It will be a cold day in hell before I’m going to help pad the pockets of a bunch of rich Texans.”[lii]

General Motors executives were not the only ones to oppose the arrival of EDS. For the 10,000 GM data processors who would be transferred to EDS, the move meant an end to the strict hierarchy and chain of command they were used to. Instead, they were told to accept lower pay, lower benefits, and more job risk under EDS management. GM employees wondered how EDS could be owned by GM and yet be in charge. Some of the data workers applied to the UAW for affiliation, a move that upset EDS’s traditionally union-free labor relations.

Meanwhile, Ken Riedlinger, EDS’s most senior officer in Detroit, was receiving hate mail, obscene phone calls, and was finding his car tires slashed almost daily. Ultimately, he quit.

Perot himself received a cold shoulder. On arriving for his first meeting of the board of directors, he found that he had been placed on the public policy committee, the least influential of any of the board committees. Perot believed that the holder of 11 million shares should be closer to the beating heart of GM’s decision making, on the finance or executive committees. Perot’s irritation, however, was minor compared to the fundamental difficulties of getting GM and EDS to work together.

The agreement that EDS would have a monopoly over GM’s data processing business soon broke down. GM, because of its size, was used to being able to bully its suppliers. EDS, by contrast, charged premium prices for the vast numbers of computers and processors it wished GM to purchase. The data processing department felt it should be receiving discounts. EDS replied that if GM wanted a twenty-first century computer system, then it needed to pay what it cost. Anyway, advanced systems would help lower costs for GM in the long term. By the same token, EDS was astonished by examples of spectacular inefficiency and money-wasting inside GM, but felt they weren’t given the opportunity to cure them. EDS felt its efforts were being sabotaged by their own client. The result was constant bickering over pricing and contract terms, so that it wasn’t until April 1986, nearly two years after the merger, that GM and EDS finalized a pricing agreement for EDS’s services. The compromise settled little – just months later, Perot considered suing GM for its failure to sign long-term contracts with EDS.[liii] Increasingly, EDS-ers found themselves appealing to Perot, and GM-ers to Smith for help in defending their turf. The two chief executives found that their main role in the merger was as peacemakers.

Another increasingly bitter bone of contention concerned compensation. GM employees were used to climbing up an utterly predictable career ladder, with guaranteed annual salary increases, regular bonuses, a generous package of benefits, and a secure retirement. Compensation at GM was utterly risk free and never spectacular. Roger Smith certainly made a lot of money – more than most executives in the country – but even Smith’s pay paled in comparison to the fortunes amassed by EDS’s senior officers. EDS was a place where spectacular fortunes could be made in a relatively short time. Base salaries and benefits were small – far smaller than GM’s – but the possible rewards via stock options and performance grants were the stuff of dreams. Perot loved incentives: if his people performed, he rewarded them lavishly. For instance, his number two, Mort Myerson, was promised a salary equal to one percent of EDS’s 1984 profits – the sky was the limit. Perot believed that this motivated not just his top employees, but everyone in the company, since even the lowliest worker could see that hard work and success were rewarded with wealth. Perot believed that such a system was essential to the success of EDS.

Compensation soon became a thorny problem. The nature of the original merger agreement meant that even as relations between the two companies grew worse and worse, EDS-ers continued to expect huge rewards. But GM dragged its feet on the lavish stock bonuses promised in the merger agreement. Under EDS’s pre-merger stock incentive plan, shares were due to have been distributed late in 1984. Following the merger, the award was postponed until early 1985. By mid-summer, no decision had been reached, despite Perot’s frequent reminders to Smith. Perot became annoyed. Not only did he regard the stock awards as his prime means of employee motivation, but they had been categorically guaranteed in the GM-EDS merger agreement.

The cause of delay was Roger Smith. He was insulted by how much wealth was already being transferred to EDS employees and the proposed grants were far richer than the grants made to any GM executive, including Smith. GM had already made EDS’s top executives multimillionaires – Perot was worth nearly a billion, Myerson a hundred million – and Smith couldn’t justify any extra largesse. By GM’s calculations, the award would cost GM a further $300 million – paid to people already vastly wealthy thanks to GM. In Smith’s view, the payouts were obscene. In Perot’s view, that was the way EDS had always worked and, under the merger agreement, would continue to work.

Finally, Smith told Perot that he was vetoing the grants, and he traveled to Dallas to explain why to the top EDS officers. The meeting was not a success. According to Levin’s account, Tom Walter, EDS’s CFO, told Smith that he was overstating the cost to GM of the stock grants because he was working from a false set of numbers. Levin writes:

Walter didn’t get a chance to finish his point.

People in the room later would remember Smith’s angry explosion as being wondrous and terrifying at the same time: wondrous for the extreme colors and sounds it brought to the room, terrifying because none of them had ever seen someone lose his temper so completely in a business meeting . . .

“Don’t tell me my numbers aren’t correct,” Smith sputtered. His already ruddy expression flushed a furious scarlet. His voice rose almost to choking, and he slammed his briefing book on the table.

Inadvertently, Walter had delivered the most humiliating insult possible to a GM financial executive. Smith might have endured accusations of being a poor marketer or manager. Telling a GM finance man he had “bad numbers” was invitation to a brawl.

“I didn’t come here to be insulted,” Smith shouted. By this time flecks of saliva had formed at the corners of his mouth. The EDS officers stared in disbelief as the chairman of the world’s biggest and most powerful company lost it.[liv]

The outburst was the first step down a slippery slope that led to Perot’s separation from GM. Despite all the problems involved with integrating EDS into GM, and despite all the petty rows and disagreements and frustrations, Perot had always believed that the merger would work. He had expected difficulties, and he had expected it to be hard to merge a small, lean, entrepreneurial company with a vast, old, and bureaucratic one. But ultimately, Perot had believed it could be done. He felt that he and EDS had something that could help GM. Following Smith’s outburst, he began to doubt it. He began to doubt that Roger Smith was a man with whom he could do business or that GM could overcome its culture. Perot thought he had been brought on board to shake GM up a little. Now he wasn’t so sure it could be done. Was Smith really ready to do what it would take? Was he going to talk about revitalizing GM, or was he actually going to do it?

But Perot was more than just the man who had created EDS. He was also GM’s largest shareholder, with tens of millions of dollars tied up in the company’s performance. And as grave as EDS’s problems with its new corporate parent might be, Perot was first and foremost a member of the GM board of directors.

Perot was concerned that even as GM’s massive capital spending program was failing to solve the company’s fundamental problems, Smith was intent on spending big bucks to acquire Hughes Aircraft. To Perot, the purchase was simply money down the drain at a time when GM was taking bigger and bigger hits to its market share.

Perot’s increasing dissatisfaction at GM and its management reached a climax at a board meeting held in November 1985. One of the items of the agenda was for final board approval to buy Hughes Aircraft for $5.2 billion. To Perot, the planned purchase represented everything that was wrong with the way GM was being run – big, thoughtless spending with no regard for the company’s most basic problems.

In a dramatic speech to the board, Perot explained his opposition.

First, he outlined where he thought GM had gone wrong. He explained that the company was “procedures oriented, not results oriented” and that business matters that should be decided in minutes took days or weeks shuttling up the hierarchy in a series of unproductive meetings. “Senior management is too isolated from the people,” Perot concluded.[lv] Perot told the board that he had attended a Cadillac dealer’s conference where the common complaint had been that it was impossible to sell Cadillacs when they were riddled with defects. Perot had asked the dealers why the problems were so pervasive: “The answer was ‘GM doesn’t give people the responsibility and authority to get things done – and the GM system avoids individual accountability.’”[lvi]

Perot asked the directors why they should approve a $5 billion purchase for space-age engineering when GM couldn’t even build a reliable car. He argued that throwing money at the problem was not going to solve it: “The experiences of our successful competitors demonstrate that people – plus the intelligent application of capital – are the keys.”[lvii] Whether Perot meant it to be or not, this was a sharp dig at Smith’s entire strategy.

Perot didn’t just attack management, he also went after the board. He called for the board to become a genuine decision-making body, not a silent ratifying counsel: “We must change the format of board meetings from passive sessions with little two-way communication to active participatory sessions that allow us to discuss real issues and resolve real problems.”[lviii] Months earlier, Perot had sought approval from Smith for meetings of the outside directors alone. He felt the board would be better able to assert its independence if it was freed from the counterweight of the executive board members. Smith refused Perot’s request.

Perot reminded the directors of their duty to represent the stockholders:

They own this company. We must make it clear that the management serves at the pleasure of the shareholders. . . . The managers of mature corporations with no concentration of owners have gotten themselves into the position of effectively selecting the board members who will represent the stockholders.[lix]

When it came to a vote on the Hughes purchase, Perot’s was the lone dissenting vote. It was the first such dissension in the GM boardroom since the 1920s.

Relations could not but deteriorate. Perot and Smith continued to haggle over compensation and bonus formulas, an issue that Perot believed was none of GM’s business. Meanwhile, Perot forbade GM to audit EDS’s books. In a series of increasingly combative letters to Smith, Perot demanded that EDS be left to run its business independently – the way the merger agreement intended. In a letter of May 19, 1986, Perot accused the automaker of trying to “GM-ize EDS.”[lx] Of course, the entire point of the merger had been to “EDS-ize GM.”

In background interviews with the Wall Street Journal in the spring and early summer of 1986, Perot explained where the EDS-GM merger had gone wrong. He went far beyond the difficulties of combining the two companies; instead, he discussed why GM was failing in the marketplace. “Until we nuke the GM system,” he said, “we’ll never tap the full potential of our people.”[lxi] He was even more critical of Roger Smith than before, saying that “he talks a good game” about turning GM around but that he failed to understand how to do it.[lxii] Perot criticized management for its obsessive attention to executive perks and bonuses – and even demanded that GM scrap its executive dining rooms! Perot believed the trappings of power interfered with management’s ability to see the company in an honest light.

Perot reserved further ire for the board: “Is the board a rubber stamp for Roger? Hell, no! We’d have to upgrade it to be a rubber stamp.”[lxiii] Perot believed that the board knew nothing of GM’s fundamental problems. Each outside director received the latest GM model every three months – what would they know about reliability? Perot bought his own cars, and sometimes visited showrooms incognito, trying to discern problems. He came across GM dealers who were now selling Japanese cars to stay competitive. How could the directors, receiving a new car every 90 days, hope to know anything about problems like these?

The Wall Street Journal published Perot’s comments – much watered down – in an article entitled “Groping Giant.” The article showed how GM, despite its pricey automation drive, was more inefficient than its rivals and losing market share as a result. “Poised for the 21st Century?” asked the Journal, the first paper to criticize Smith’s highly lauded strategy.[lxiv] The criticisms were backed by the poor performance of the year. The rest of the financial media pricked up its ears, and Perot was willing to talk. In a series of interviews, Perot continued to assail GM, telling Business Week that “revitalizing General Motors is like teaching an elephant to tap dance.”[lxv]

As the battle between Perot and Smith became ever more public, so the chances of reaching an understanding became ever more slim. Smith was infuriated by Perot’s public ridicule of GM; senior executives were distressed by the lack of respect Perot showed for what had for so long been the most respected company in the world. The marriage between GM and EDS had broken down irreparably, and divorce became the only option.

Perot’s lieutenants and GM counsel negotiated a buyout of Perot’s holding in GM. On December 1, 1986, the board agreed to pay Perot $742.8 million for his stake in GM. The buyout offered $61.90 for shares that were then trading at about $33. In return, both GM and Perot agreed that neither side would criticize the other, on penalty of $7.5 million. In other words, if Perot continued his attacks on GM, he would have to return $7.5 million to GM. The buyout was so preferential to Perot that he couldn’t believe the board approved it. He thought the price was so great that the directors could not but oppose Smith. Perot was dumbstruck that not one director dissented from the decision to send him packing with so much of GM shareholders’ money. In court testimony two years later, Perot said, “My attitude all the way was no one will ever sign this agreement on the GM side, it’s not businesslike. I underestimated the desire on the GM board to get rid of me.”[lxvi] Perot was concerned the press would report that he had bribed GM, that he had offered the deal as the price of his silence. He was determined to show that GM had initiated the deal. So he offered the money back. He put the money in escrow and gave the GM board two weeks to rethink the decision to buy him out. If, after two weeks, the board of directors thought that ridding GM of Ross Perot was in the shareholders’ best interest, he would take the money. If not, Perot would pay the money back and continue to work at GM. In a press conference held immediately after he signed the buyout agreement, Perot told reporters, “Is spending all this money the highest and best use of GM’s capital? . . . I want to give the directors a chance to do the right thing. It is incomprehensible to me that they would want to spend $750 million on this. I am hopeful that people will suddenly get a laserlike focus on what needs to be done and do it.”[lxvii] Following the announcement of the buyout, and Perot’s press conference, GM stock declined $3, and EDS stock lost $4.50.

Ross Perot’s involvement in GM caused almost untold bad publicity for GM. Roger Smith and his fellow board members were painted as corporate villains. One group particularly incensed was, unsurprisingly, the shareholders. One sizable shareholder, the State of Wisconsin Investment Board (SWIB), wrote a letter to GM directors saying the buyout “severely undermines the confidence we have in the board and in the officials of General Motors.” SWIB was prepared to back up its letter with a shareholder resolution or a lawsuit, but one phone call from GM to the governor of Wisconsin threatening to shut down some planned developments in the state, quickly put an end to the protest.

This last story is, if nothing else, indicative of the governance structure at GM. Roger Smith ran his company unchallenged by either the board or the shareholders the board was meant to represent. Smith wanted to revitalize the company, but it had to be done his way.

Was this mode of operation in the best interests of GM’s shareholders?

general motors after perot: smith and stempel

From 1984 to 1986 Smith garnered universal praise for his effort to push GM into the future, and won just about every business award going. In 1985, the New York Times Magazine featured him in an enthusiastic cover story. In 1986, he was named 1986 Executive of the Year by both Financial World and Chief Executive. But the tide turned that same year.

Not only did the Perot affair leave Smith with egg all over his face, but the company’s performance demonstrated that Smith’s strategy, now five years old, was not achieving results. Instead, Smith’s drive for automation had merely turned GM from the lowest cost producer among the Big Three to the highest.

The combination of these results and the devastating adverse publicity of the Perot episode changed many perceptions of GM. Suddenly, Smith was no longer seen as a corporate wizard, but as a bully who couldn’t take criticism.

Roger Smith certainly wasn’t to preside over an upturn in GM’s fortunes over the last years of his tenure. In his last four years at GM, Smith found himself under pressure from all sides as GM’s results continued to deteriorate. The company still suffered from excess capacity, bearing huge fixed costs. Smith was faced with either raising sales, and thus productivity, or downsizing the company in line with GM’s diminishing market share.

On the eve of Smith’s retirement, GM’s results were worse than ever.

By 1989, GM was recording a market share of 34.4 percent. This was down from 44.1 percent in 1979. This decline meant nearly $10 billion per year in lost revenue to GM.

Between 1980 and 1990, the S&P 500 rose 227 percent, and it appreciated 27.3 percent in 1989 alone. GM, by comparison, had achieved 69 percent and 1.2 percent respectively.[lxviii] ? Harbour & Associates, an automotive consultancy based in Troy, Michigan, found that over the 1980s, GM’s assembly efficiency had improved 5 percent compared with 17 percent at Chrysler and 31 percent at Ford.

The post-Perot board

The Perot affair had some impact on the board. The Wall Street Journal reported years later that directors such as John G. Smale, then CEO of Procter & Gamble, and former ambassador Armstrong were afraid their personal reputations would suffer if they didn’t do something about the “pet rock” image that they had acquired as a result of Perot’s media barnstorming. The Journal quoted one source as saying, “There’s a feeling that perhaps [the board] wasn’t as involved in some past decisions as it should have been.”[lxix] They were backed by GM’s outside counsel, Ira Millstein, a partner at the New York firm of Weil, Gotshal & Manges, who was a vocal governance advocate. Millstein counseled the outside directors to assert more independence in the face of some of Smith’s requests.

There were other signs of increasing discontent among board members. In 1988, GM’s general counsel, Elmer Johnson, quit. Johnson had been brought in from outside – a rare move for GM – as part of Smith’s plan to nudge the GM system. Johnson had been motivated by the hope that he might achieve the presidency, but he soon became disillusioned at his lack of ability to change the GM establishment. Shortly after, James D. Robinson, chairman of American Express, resigned from the board after a short tenure. Even he, a stern ruler of his own fiefdom, was frustrated by the lack of power board members possessed in the face of Smith’s determination to manage his way.

The board got its chance to assert its independence in 1988. Smith proposed to add three further GM officers to the board. The move would have meant that insiders made up 40 percent of the board. Smith was rebuffed. It was the first time anyone could remember a GM chairman not getting his way with the board.[lxx] Another factor in the board’s new independence could have been the growing activism of some of GM’s shareholders. GM’s owners were becoming increasingly uneasy about the company’s management and the stock’s continued stagnation. The year before Smith retired, GM’s board voted to raise executive pensions. Smith himself would see his pension rise from around $700,000 to $1.25 million. The raised pensions would affect 3,350 managers and cost $41.6 million annually. GM said such a move was necessary to attract top talent. Many shareholder groups, including Institutional Shareholder Services, agreed, saying the increase was was needed to bring GM’s executive pensions up to par with those offered by GM’s competitors.

Though the board had the sole power to approve the increased pensions, they decided to seek shareholder ratification nonetheless. In doing this, GM was attempting to rid itself of the shareholder-unfriendly image it had acquired thanks to Ross Perot. In the 1990 proxy, the board sought a shareholder vote on the move. Though the measure ended up being overwhelmingly approved – by 87 percent in favor – the size of the increase caused a blaze of criticism for management and the board. For instance, the local public employee pension fund, the Michigan State Retirement System, voted to oppose the moves. Smith described the idea to permit a shareholder vote on the raise as a “corporate governance experiment gone astray”[lxxi] and said that he regretted involving the shareholders in the decision to raise pensions.

As Smith’s retirement neared, shareholders made their presence known once again. Traditionally, the leadership transition at GM was uncontroversial. The outgoing CEO generally tapped his successor long before any retirement date. The result was a smooth succession of GM loyalists. Since 1958, the baton had always been passed to a finance chief. It was also customary for the outgoing CEO to retain a seat on the board.

The succession process was worrisome to two of GM’s largest owners, the California Public Employees Retirement System (CalPERS) and the New York State Retirement System (NYS). Both were pension funds serving the public employees of their respective states, and both were vocal governance activists. The two groups were worried that the clone-like succession process at GM was contributing directly to GM’s decline. It was particularly nettlesome to these investors that the retired CEO could continue to exert influence over his successor via his seat on the board. There was no room for an outsider, someone who might have fresh ideas or a new approach. The process, like everything at GM, seemed geared to conservatism, making sure the company continued to be run in the same way it always had – clearly not a good idea at this point in GM’s history.

Ned Regan, the New York State Comptroller at the time, asked what “pro-cesses and criteria” the GM board would use to select Smith’s successor. Regan cited some of GM’s dismal results, saying, “presumably these figures point to a management problem.”

CalPERS wrote a similar letter to GM’s directors, adding a specific recommendation: that Smith not be retained on the board.

The directors never even responded to the shareholders’ concerns, preferring to leave their answer to a corporate spokesman who replied huffily, “Corporate governance, which includes the selection of officers, is the board’s responsibility.” According to one report, Roger Smith even called the governor of California to complain about CalPERS’ unsolicited advice.

CalPERS and other shareholders lost that round, but they went on to win others. In 1990, at shareholders’ urging, GM adopted a provision against greenmail, prohibiting the company from buying shares at above-market prices from anyone who has held more than 3 percent of the company’s voting stock for less than two years. In 1991, GM adopted CalPERS’ proposal to have a bylaw-mandated majority of outsiders on the board.

Of course, both of these victories were symbolic only. There was no chance that any raider was looking to be paid greenmail by GM, though the clause would prevent anything like the Perot buyout from ever occurring again. Also, GM had had a majority of outsiders for years and wasn’t looking to change such a makeup. The bylaw merely confirmed what had been the case for many years.

In April 1990, GM picked a new CEO, Robert Stempel. Stempel had spent his GM career as an engineer, and his appointment constituted a significant departure from the run of finance men who had headed GM since 1958. One person overjoyed at the news was Ross Perot, who told the Washington Post, “This is too good to be true. This is an all car-maker team. It’s a terrific day for General Motors.”[lxxii] Stempel took over from Roger Smith on August 1, 1990. But Smith continued to hold his seat on the board.

Even during the succession process, the board failed to impose its authority. Stempel wished to have Lloyd Reuss as president, in charge of North American Operations. The board vacillated. They didn’t have much faith in Reuss’s abilities, but they capitulated in the face of Stempel’s demand that he pick his own management team. As a signal of displeasure, the board withheld the title of chief operating officer from Reuss.

Stempel had a great first day as CEO. On his second day, Iraq invaded Kuwait, setting off a period of unease in America and a worldwide recession. GM, Stempel would later reflect, headed into a “kamikaze dive.”[lxxiii] The fundamental premise behind doing business in as cyclical an industry as that of cars is to make money hand-over-fist in good times, and try to retrench and curb losses in bad. The excellence of the good years should make up for the depressed conditions of the bad. But GM lost money in the boom market of 1986–87; now it had no brake shoes to slow its own drive downward as the economy skidded into recession. The reality of Smith’s failure became vividly and shockingly clear during the next two years.

Before 1990, GM had never recorded back-to-back yearly losses. During 1990–92, GM suffered three. As the 1990s wore on, it became ever more apparent that GM was suffering more than a downturn; it had struck a full-scale crisis. The root of the problem was the disastrous state of GM’s North American operations, which suffered from being the highest cost producer in the flattest auto market since 1982.

1990 ushered in the worst yearly loss in GM’s history.

In the final quarter of 1990, GM recorded its worst ever quarterly loss, $1.6 billion.

Between June 1990 and September 1991, GM recorded five straight quarterly losses totaling $5.8 billion.

North American Operations lost approximately $10 a share in 1990.[lxxiv] ? In 1991, North American Operations lost $7.1 billion. That’s $1,700 on every car and truck it sold in North America.[lxxv]

During 1990–92, North American Operations racked up losses of almost $15 billion.[lxxvi]

A 1992 Harbour & Associates study showed that GM spent $795 more to assemble a car than did Ford. This translated into a $4 billion a year disadvantage.

Stempel continued the downsizing that Smith had begun in 1986. In October 1990, GM announced the closure of seven plants, requiring a charge to earnings of $2.1 billion. Months later, in February 1991, GM announced it would cut a further 15,000 white-collar jobs from the workforce by 1993, with 6,000 employees being pared in 1991 alone.

The aim of the downsizing was to reduce GM’s huge capacity in line with its diminished market share. GM hoped to become competitive by running fewer factories faster. Smith’s $90 billion spending had failed to achieve this simple aim.

The closing of plants, and the layoffs they involved, usually evoked a storm of protest from the UAW. This time around, however, the union stayed silent. That was because of a contract, signed between GM and the UAW in March 1990, in which GM guaranteed to keep paying its 300,000-plus blue-collar workers up to 95 percent of their salary for as long as three years if they were laid off. From GM’s point of view, the contract bought peace, enabling the company to downsize quietly and quickly.

In practice, the contract only damaged GM’s ability to compete during the recession. By paying even those workers it laid off, GM turned what was normally a modest variable cost into a gigantic fixed one. Generally, automakers lower costs during times of slow production by laying off workers who are not needed. The company can then rehire them when sales pick up. In this instance, however, GM was struggling through a recession with a payroll better suited to boom times, employing as many as 80,000 workers to stay at home.

The contract destroyed GM’s ability to control the cost of its workforce. It cost GM $500 million within a few months of its signing. GM had pledged $4 billion to the job security fund, to last through 1993. Now, some GM officials felt that might not be enough.

General Motors’ competitors were having a field day. In 1990, Japanese automakers acquired four points of market share in one year, for a total of 29 percent.

General Motors needed new infusions of capital to repair its balance sheet. In 1991, GM was able to raise $2.4 billion via new common and preferred stock issues, but this equity was matched by increased debt. GM’s long-term debt nearly doubled between 1985 and 1991, to 35 percent of equity – not a crippling ratio by the standards of the time but an alarming contrast to GM’s traditionally rock-solid balance sheet. Given the terrible state of the auto market, the heavy debt load threatened GM’s ability to borrow further. The company took steps to conserve cash.

Early in 1991, GM nearly halved its annual dividend, slashing it to $1.60 from $3. The cut saved GM over $840 million a year.

GM slashed its capital spending by $1.1 billion for the years 1992–93.[lxxvii]

As GM ran low on cash to support its operating expenses and stock obligatons, the credit rating agencies threatened to downgrade. In November 1991, Standard and Poors announced that it was putting GM on a credit watch, with potentially disastrous consequences for GM. Fortune wrote, “For a company that once routinely luxuriated in triple-A ratings, the prospect of a downgrading was not only an embarrassment but a financial menace. Borrowing costs for GMAC, which is GM’s finance arm, could increase by $200 million or more annually.” By the end of the third quarter of 1991, GM had $3.5 billion in cash – half the amount it usually kept to meet payroll demands and pay suppliers, and less than half the amount of cash kept on hand by Ford.[lxxviii]

Another element of GM’s shaky finances was the underfunding of GM’s pension fund by nearly $17 billion in late 1993.[lxxix] From 1989 onward, to make up for its cash shortage, GM began diverting money earmarked for the pension fund to operations. To keep the pension fund looking healthy, GM made generous assumptions about the rate of return it would achieve. For 1992, GM had targeted an 11 percent rate of return, but only achieved 6.4 percent.

While Stempel denied that the cash squeeze would harm GM’s ability to develop new models, analysts remained skeptical. One plant due to produce a new model of a successful Chevrolet truck was forced to stand idle until 1994.[lxxx] Given these problems, the board could not stay stuck in neutral. By late 1991, it became obvious that GM had to undergo a massive overhaul to survive. Moreover, GM could no longer resort to the Roger Smith solution of throwing money at the company’s problems. The GM board finally pressed Stempel to take the necessary, savage steps to put North American Operations back on the road to profitability.

In December 1991, Stempel announced the most sizable cuts to date. GM would close 21 plants over a three-year period, cutting 74,000 jobs in the process. The aim was to reduce GM’s capacity by one-fifth so it could operate profitably on a 35 percent market share. It appeared likely that at least some of the plants scheduled for closing were ones that had been renovated and modernized in the 1980s at a cost of billions. Fortune called it “the greatest upheaval in [GM’s] modern history.”

The board was still not satisfied. They wanted Stempel to drive a sense of urgency through every part of GM, instilling the kind of cultural change that Smith had so longed for. It was becoming apparent to the board that nothing short of a revolution at GM could cure its ills. But Stempel was a reluctant revolutionary, insisting to the board and shareholders alike that the company would pick up with the economy.

On April 6, 1992, the board put Stempel on notice. Stempel was demoted from his post as chairman of the executive committee (a group created in 1989, but seldom convened). At the same time, Lloyd Reuss, Stempel’s right-hand-man, lost his job running North American Operations and was removed from the board. In a candid press release, the board said, “Regaining profitability requires a more aggressive management approach to remove excess costs.”

The Wall Street Journal put Stempel’s “wing clipping” into its corporate governance context: “He became the first GM chief executive in more than 70 years to lose control of his board.”[lxxxi] It also reported the comment of one outside director: “[Stempel’s] heart is in the right place, but bold moves aren’t in his nature. He needs to be prodded. That’s where the board comes in.”[lxxxii] The new-found boardroom activism put GM’s stock up $1.25 in a heavily down market.

Reuss was replaced at North American Operations by John “Jack” Smith, who had previously run GM’s profitable European operations in the mid-1980s and turned a big loss-maker into GM’s most profitable operation.

The media engaged in a frenzy of speculation as to which directors had demanded the move and how the decision to scold Stempel publicly had been reached. The Wall Street Journal reported that Roger Smith, who was still a board member, hadn’t been invited to some of the key meetings. Smith apparently thought the board had acted hastily, just as GM’s fortunes were on the upturn. According to the Journal, Smith told friends that if the board had held off for six months, they wouldn’t have acted at all.[lxxxiii]

The energy behind the announcement of April 6 was apparently Millstein, GM’s outside counsel. Millstein had been doing a busy job as go-between, meeting not just with GM board members but with big, angry investors such as CalPERS. In the January 1992 board meeting, when Stempel was accompanying Bush to Japan, the outside directors met alone with Millstein – a rebellion that would have been unthinkable under Roger Smith.

The media also speculated that Stempel’s demotion would undermine his leadership, leaving him looking over his shoulder, uncertain if he had the confidence of the board. From April onwards many were simply awaiting the moment at which Stempel would be replaced. In October 1992, as rumors flew, the GM directors issued a statement saying that the board “continues to reflect upon the wisest course for assuring the most effective leadership for the corporation.” This was hardly a vote of confidence.

As the pressure to remove Stempel became overwhelming, other changes seemed to be waiting in the wings. Analysts contemplated the possibility of another dividend cut; shareholder activists waited to see if Roger Smith would be forced off the board, or if GM would separate the roles of CEO and chairman.

The end, when it came, was almost anticlimactic. On October 26, 1992, Stempel resigned as chairman and chief executive officer. On November 2, the board approved the appointment of Jack Smith as CEO, and John Smale as chairman of the board. Thus, Smith would be in charge of day-to-day operations but would have to report to Smale as chairman. Roger Smith resigned from the board, and three new directors were named. GM also slashed its quarterly dividend to 20 cents a share.

In an interview with Time, one outside director commented nostalgically on the seismic shake-up that had taken place at GM. “This is not the company it once was,” he said.[lxxxiv]

Lessons for the board

Following Stempel’s ouster, the GM board was hailed for its activism. Trumpeting “The High Energy Boardroom,” the New York Times hailed “the outside directors that shook GM.”[lxxxv] The Wall Street Journal responded similarly, with an op-ed that declared, “Board Reform Replaces the LBO.”[lxxxvi]

In fact, the board deserved as much criticism as either Roger Smith or Robert Stempel. The directors took hold of their duties only years too late. After Stempel’s departure, one outside director told Time, “There is going to have to be special oversight by the board for the next three years.”[lxxxvii] Why had there been no special oversight in the 12 preceding years?

The GM board learned something between the buyout of Ross Perot in 1986 and the edging out of Robert Stempel in 1992. They learned that no company can remain unaccountable to the market forever. For years, GM’s size and wealth protected the company from the competitive forces that caused change at Ford and Chrysler. But, ultimately, GM could not escape from its own failed strategy. Having spent itself into financial peril, with no commensurate increase in quality productivity or sales growth, GM was brought to the brink of collapse. There was even speculation that GM, once the defining symbol of American industrial success, would file for Chapter 11 bankruptcy protection.

It was only at this point that the board got a grip. It took the bold step of opposing Smith in 1988, and the departure of Robinson and Johnson sent another strong signal of frustration. But the board continued to play a waiting game. Smith’s tenure would soon be over, and change could be effected through the succession process. But in all the time the board waited, GM’s results grew worse and worse, and the company’s basic flaws went ignored.

In 1990, the board rejected the idea of appointing an outsider as CEO, though they considered that possibility. They believed that Stempel, a car guy, could tackle GM’s problems with sufficient aggression. But as the recession sent GM into a nose dive, the board became convinced it had been mistaken. Stempel was not the right man for the top job. Barely 18 months after his appointment, Stempel was put on public notice to do better. Six months later, he was fired. Eventually, finally, tragically late, the board did the right thing.

In the five years that the board took to summon up the courage to do its duty, GM dug itself into a hole of such proportions that it will take a further five years for the company to climb out. The price has been paid by GM’s shareholders, its suppliers, its employees, and most everyone with an interest in the economy of the mid-west.

The GM board is now determined that the same mistakes will not be made again. GM’s current bosses have a new commitment to corporate governance. In a November 1993 Fortune article, GM’s chairman, John Smale, outlined eight rules for building a better board, which reflected principles being adopted in the GM boardroom.

There should be a majority of outside directors.

The independent members of the board should select a lead director.

The independent directors should meet alone in executive session on a regularly scheduled basis.

The independent directors should take responsibility for all board procedures.

The board should have the basic responsibility for selection of its own members.

The board should conduct regularly scheduled performance reviews of the CEO and key executives.

The board must understand and fully endorse the company’s long-term strategies.

The board must give an adequate amount of attention to its most important responsibility: the selection of the CEO.

General Motors: a postscript

Ross Perot liked to say that getting GM moving again was like teaching an elephant to dance.

So, how are things in Jack Smith’s salon? Is the elephant turning elegant wheels round the ballroom? Or is it still treading on everyone’s toes?

Fortune magazine took an in-depth look in 1997 and found that, unfortunately, this monster company was proving as difficult as ever to shift.

On the good side, GM’s famously rock-solid finances have largely been restored - the company ended 1996 with $14 billion in reserve - thanks to a considerable consolidation of assets. In 1996, for example, GM’s defence electronics business was offloaded to Raytheon for $9 billion. A 20 percent stake in the Delphi parts-making business was also offered to the public.

International operations continued to perform strongly, as did the GMAC finance arm. And, in the core domestic market, GM makes money on trucks.

But, in its own back yard, the company still can’t turn a decent profit making cars.

In 1996, North American Operations returned just 1.2 percent on sales. If you exclude the contribution from the parts-making subsidiary (according to GM’s own accounting policy), NAO’s return does even worse - a mere 0.8 percent return. This does not compare well with the company’s target of 5 percent. NAO, said Fortune, “remains burdened by its past.”

Fortune asked “Why is it so hard to get this monster moving?” And then answered its own question by suggesting that “GM dithers over almost everything.”

The magazine pointed the finger at many of the problems that we saw in the Roger Smith era – confusion and inter-rivalry between the six vehicle divisions, and infighting between powerful groups of suppliers, dealers, and unions. Labor relations, Fortune commented, hit a “post war low.” In 1996, UAW strikes prevented GM building 300,000 cars at a cost of $1.2 billion after tax.

The current chairman and CEO, Jack Smith, told Fortune that his task is to get GM to “run common.” This sounds like an uncomfortable echo of what Roger Smith was trying to achieve nearly two decades previously.

GM has long been identified as a sprawling, cumbersome beast. But even when it streamlines operations, the company is still left playing catch-up. Fortune outlines how duplicative and wasteful is the simple process of metal stamping. GM spend $850 million to standardize the die production at 13 plants and reduce the number of press line set-ups from 57 to 6. But when the reform is complete, GM still be spending 20 percent more on metal stamping than Toyota.

This competitive disadvantage is mirrored in other key areas. GM takes 29 hours to assemble a Pontiac; Toyota assembles a Camry in 20. GM’s domestic plants spend an average 3.5 months getting production of a new car up and running at full speed in an assembly line. Honda does it in a weekend.

Nor is GM any better positioned in the contemporary domestic market. For example, the demand for trucks, sports utility and minivans has grown at such a pace that they now account for 50 percent of the total US auto market. But three of GM’s six divisions continue only to make cars.

The result? GM continues to be seen as old-fashioned and backward-looking - a view that is reflected in sales. At Oldsmobile, sales went from 1.1m in 1986 to 331,287 in 1996. Fortune comments: “If GM had decided to kill Olds in 1992, it would have been euthanasia.”

As a whole, GM’s market share for the first two months of 1997 was 30.3 percent, down from 32.5 percent for the same period a year before.

Fortune’s conclusion: “Fixing GM has turned into a decade-long project that few people – investors, analysts, or company executives – can have foreseen.”

How might GM’s fortunes have turned out differently if Smale’s rules had been in place, and obeyed, at GM from 1980 onwards? Or from 1960 onwards?

Was Roger Smith right to chose revolutionary change over evolutionary change?

Why did Smith fail? Did he have the wrong strategy, or was the strategy poorly executed?

Was GM’s problem one of managerial incompetence or board neglect?

Did Smith do anything more than just to throw money at problems? How did he use his capital? How should he have used it?

To what extent was GM’s problem one of “culture” or bureaucracy? Was the company so poorly organized that it was capable of swallowing any amount of money with no constructive result?

Could GM’s culture have been changed from the top – i.e. by a new type of CEO?

Is Smith characteristic of American CEOs today? Can you identify companies with a Roger Smith at the helm?

To what extent are the changes in GM attributable to competition from outside the US? Why couldn’t competition from within the US have been more effective? To what extent was the absence of strong domestic competition the result of GM’s influence with the government?

Does it appear that GM’s problems are uniquely American? Or will Daimler-Benz, Mitsubishi Heavy Industries, and ICI have similar histories? Is there such a thing as “large company disease”? How can it be treated?

What is the definition of boardroom negligence? Is there a standard of corporate poor performance which suggests that the board is guilty of negligence?

Should boards of directors, and more particularly board nominating committees, insist that any search for top officers, especially the CEO, includes candidates from outside the company? What are the benefits and dangers of promotion from within?

Since World War II, all the largest US institutional investors have held GM stock. They continued to hold it through the 1980s and 1990s. To what extent were those investors negligent in failing to demand better performance? What should, or could the shareholders have done?

The narrative arguably demonstrates the failure of management, the board, and the shareholders to prevent GM’s decline. Does this suggest a basic failure in the governance structure. What other structure might work better?

What might have happened in the 1970s and 1980s if an investor such as the DuPont company had owned 30 percent of GM’s stock?

At what point in the narrative should the directors have intervened?

Ross Perot owned less than 1 percent of GM’s shares. Was Ross Perot’s stake too small to ensure his continued involvement in the company? To what extent can Perot be accused of “selling out”? If Perot had owned 5 percent, or 10 percent, would he have agreed to the buyout?

What might have happened if each of GM’s outside directors had held 25 percent of their own net worth in GM stock?

--------------------------------------------------------------------------------

[i] Alfred D. Chandler and Stephen Salsbury, Pierre S. du Pont and the Making of the Modern Corporation (Harper & Row, New York, 1971), p. 443.

[ii] Id., p. 444.

[iii] Id., p. 460.

[iv] William Taylor, “Can Big Owners Make a Difference?,” Harvard Business Review, Sept.–Oct., 1990, p. 74.

[v] William Taylor, “Can Big Owners Make a Difference?,” Harvard Business Review, Sept.–Oct., 1990, p. 74.

[vi] William Taylor, “Can Big Owners Make a Difference?,” Harvard Business Review, Sept.–Oct., 1990, p. 74.

[vii] Maryann Keller, Rude Awakening: The Rise, Fall and Struggle For Recovery of General Motors (William Morrow, New York, 1989), p. 33.

[viii] Alex Taylor, “Can GM Remodel Itself?” Fortune, Jan. 13, 1992, p. 32.

[ix] Keller, supra, p. 65.

[x] Taylor, supra, p. 32.

[xi] Keller, supra, p. 106.

[xii] Levin, supra, p. 152.

[xiii] Keller, supra, p. 50.

[xiv][xiv] J. Patrick Wright, On a Clear Day You Can See General Motors: John Z. DeLorean’s Look Inside the Automotive Giant (Wright Enterprises, Grosse Pointe, Michigan, 1979), p. 4.

[xv] Id., p. 27.

[xvi] Levin, supra, p. 149.

[xvii] Survey by J.D. Power Associates, cited in William McWhirter, “Back on the Fast Track,” Time, Dec. 13, 1993, p. 70.

[xviii] Keller, supra, p. 22.

[xix] Jacob M. Schlesinger, “Auto Companies’ Lobbying Drive Aims to Poke Widest Loophole Yet in US Fuel-Economy Law,” Wall Street Journal, Oct. 1, 1986, p. 68.

[xx] It took a long time for US automakers to exploit their advantage on safety features, though by the 1990s, Lee Iacocca was appearing in Chrysler commericals stressing that more Chrylser cars came equipped with airbags than did those of Japanese competitors. “Who says you can’t teach an old dog new tricks?” said Iacocca in a 1988 advertising campaign.

[xxi] Levin, supra, p. 156.

[xxii] Albert Lee, Call Me Roger (Contemporary Books, New York), p. 20.

[xxiii] Levin, supra, p. 155.

[xxiv] Alex Taylor, “Cars Come Back,” Fortune, Nov. 16, 1992, p. 59.

[xxv] Id.

[xxvi] Paul Ingrassia and Joseph B. White, “Major Overhaul: Determined to Change, Gen-eral Motors Is Said To Pick New Chairman,” Wall Street Journal, Oct. 23, 1992, p. A1.

[xxvii] Alex Taylor, supra, p. 78.

[xxviii] Id.

[xxix] Id.

[xxx] Id.

[xxxi] Id.

[xxxii] Id.

[xxxiii] Lee, supra, p. 24.

[xxxiv] Id., p. 99.

[xxxv] Levin, supra, p. 267.

[xxxvi] Lee, supra, p. 129.

[xxxvii] Id., p. 175.

[xxxviii] Alex Taylor, supra, p. 78.

[xxxix] Doron P. Levin, “Groping Giant: In a High-Tech Drive, GM Falls Below Rivals in Auto Profit Margins,” Wall Street Journal, July 22, 1986, p. A1.

[xl] Id.

[xli] Joseph B. White, “Low Orbit: GM Struggles to Get Saturn Car on Track After Rough Launch,” Wall Street Journal, May 24, 1991, p. A1.

[xlii] Lee, supra, p. 20.

[xliii] Levin, supra, p. 258.

[xliv] Joseph B. White, supra, p. A1.

[xlv] Id.

[xlvi] Lee, supra, p. 67.

[xlvii] Id., p. 25.

[xlviii] Keller, supra, p. 248.

[xlix] Alex Taylor, “What’s Ahead for GM’s New Team,” Fortune, Nov. 30, 1992, p. 59.

[l] Paul Ingrassia, “Board Reform Replaces the LBO,” Wall Street Journal, Oct. 30, 1992, p. A10.

[li] Levin, supra, p. 108.

[lii] Id., p. 178.

[liii] Joseph B. White, “Perot, EDS Bare Claws Over Clause, In Court and Out,” Wall Street Journal, Oct. 20, 1988, p. A3.

[liv] Levin, supra, p. 238.

[lv] Id., p. 258.

[lvi] Id., p. 258.

[lvii] Id., p. 259.

[lviii] Id., p. 259.

[lix] Id., p. 260.

[lx] Id., p. 276.

[lxi] Id., p. 284.

[lxii] Id., p. 285.

[lxiii] Id., p. 285.

[lxiv] Levin, supra at 39, p. A1.

[lxv] Levin, supra, p. 297.

[lxvi] White, supra.

[lxvii] Levin, supra, p. 326.

[lxviii] James B. Treece, “Can GM’s Big Investors Get It To Change Lanes?” Business Week, Jan. 22, 1990, p. 30.

[lxix] Jacob B. Schlesinger and Paul Ingrassia, “GM’s Outside Directors Are Ending Their Passive Role,” Wall Street Journal, Aug. 17, 1988, p. 6.

[lxx] Id.

[lxxi] Marcia Parker, “GM’s Smith Still Uneasy with Holders,” Pensions and Investments, June 11, 1990, p. 14.

[lxxii] Warren Brown, “Top Production Manager Picked To Head GM,” Washington Post, April 4, 1990, p. C1.

[lxxiii] Joseph B. White and Paul Ingrassia, “Eminence Grise: Behind Revolt at GM, Lawyer Ira Millstein Helped Call the Shots,” Wall Street Journal, April 13, 1992, p. A1.

[lxxiv] ValueLine, March 22, 1991.

[lxxv] John Greenwald, “What Went Wrong,” Time, Nov. 9, 1992, p. 44.

[lxxvi] Alex Taylor, supra, p. 58.

[lxxvii] Alex Taylor, supra at 8, p. 32.

[lxxviii] Id., p. 29.

[lxxix] Barry B. Burr “GM Funding Proposal hits E shares,” Pensions and Investments, Nov. 29, 1993, p. 1.

[lxxx] Alex Taylor, supra, p. 32.

[lxxxi] White and Ingrassia, supra.

[lxxxii] Id.

[lxxxiii] Id.

[lxxxiv] Greenwald, supra.

[lxxxv] Alison Cowan, “The High Energy Board Room,” New York Times, Oct. 28, 1992, p. D1.

[lxxxvi] Ingrassia, supra.

[lxxxvii] Greenwald, supra, p. 44.


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