Tuesday, March 31, 2009

Obama Administration Protecting Taxpayers on GM

I read William Holstein's opinion piece in the New York Times today. Mr. Holstein makes several good points about the turnaround to date at GM. Progress has been made, and Rick Wagoner deserves credit for that. However, the real track record of GM over Wagoner's nine year tenure, and especially the company's slow-moving turnaround, suggest quite a different conclusion.

I reviewed the task force critique on a previous post and it's clear that GM will not meet its own, recent, turnaround targets. Something needed to be done, and it was.

What has everyone up in arms is the role of the government. However, in principle there is nothing different here than has happened many times before - a powerful stakeholder on whom a company is dependent flexes its muscles and removes the CEO. Ordinarily, we call stakeholders that act in this way "private equity investors," or "activist investors," or even a good old fashioned effective "board of directors." None of these catalysts for change are available today, so in comes the government.

I too worry about the government running GM, but in this case they are not. They are simply fulfilling their fiduciary responsibility to their own shareholders (read taxpayers and citizens). It's too bad GM's own board couldn't have done the job themselves.

Bankers 1, GM 0. Countdown with Olbermann on MSNBC Has It Right

Last night on Countdown with Keith Olbermann he asked the same question I’ve been wondering about as well (see my post) – why are the bank CEOs staying in their executive suites while GM’s Rick Wagoner is forced to walk the plank? This is not a defense of Wagoner – GM is broken and needs fixing. But what should we say about Bank of America and Citi, the two paragons of fiduciary responsibility in the banking industry? Both Ken Lewis (BAC) and Vikram Pandit (Citi) are past due. So, why?

Keith had Dan Gross, Senior Editor on Newsweek magazine and the author of Dumb Money on his show, and he made a great point. Dan reminded us that top Obama advisors are in the same inner circle as many Wall Street titans, BBM-ing on the beach in the Hamptons and Martha’s Vineyard, and digging into the double porterhouse at Delmonico’s Restaurant.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Dan is right. In Think Again: Why Good Leaders Make Bad Decisions, I wanted to know why people think they are right when they are really wrong! One of the primary ways this happens is when we let our attachments to people (and sometimes places and things) cloud our thinking. This is natural after all – who doesn’t feel comfortable with the people they know? The problem is that these attachments influence how we make decisions, and not in a good way. Why are Wall Street CEOs being spared, while GM’s Rick Wagoner is pushed out? As the old saying goes, it’s not always what you know, but who you know, that counts.

Why GM's Rick Wagoner, and not Ken Lewis at Bank of America or Vikram Pandit at Citi?

Does it strike you as odd that Rick Wagoner has been forced to walk the plank for his failures as CEO at General Motors, while Ken Lewis continues to hold court at Bank of America, and Vikram Pandit just holds on at Citigroup? The Obama Administration’s approach to the freefall in financial services has always been different than their response to the mayhem in the automobile industry:

· Billions in bailouts for Wall Street; not quite so much for Detroit.
· No questions asked early on about corporate jets on Wall Street; embarrassing the Detroit CEOs into actually riding in their own cars on the way to Congress.
· And now, pushing GM CEO Rick Wagoner out while leaving in place Lewis, Pandit, and Company.

What gives? It may be that the government sees the solution to the financial services disaster as considerably more complex than what is needed for automobiles. And certainly it appears that the consequences of Armageddon on Wall Street are much more severe to the global economy than bankruptcies in Detroit.

But the different approaches by the Feds to these two industries may also speak volumes about their mindset and assumptions. If financial services can’t be “figured out” by a task force working for a month to find solutions (as they did in automobiles), then surely we’ve got to keep the people that got us into the mess in the first place! But, is this really true? I believe this logic is fundamentally flawed, for at least two reasons:

(1) Justice must be done, and seen to be done. For the big banks, this just has not happened. Every week brings new revelations of incredible bonuses to bankers to “retain” their talents despite a track record comparable to the Montreal Expos. Why do we keep shoveling money into their companies when the very leaders who brought this calamity on themselves remain in their jobs? I don’t get that.

(2) Are the Obama economists too attached to Wall Street? The party line from Wall Street is that the housing-fueled, subprime-exacerbated, leverage-over-the-top credit crisis could not have been predicted; ergo, it’s not our fault. Others have pointed out in fine detail how faulty this argument, so why are the Obama economists buying it? I believe it is because of an inherent belief and attachment to the people who make their living on Wall Street, an attachment that biases their ability to be clear-eyed in their assessment of the leadership talent in place.

If Rick Wagoner is being held responsible for “leadership mistakes” at GM, why not Ken Lewis and Vikram Pandit?

Monday, March 30, 2009

Meet GM's New Board of Directors – The Government

With the news that President Obama’s task force is sending (very) tough love out to GM and Chrysler, taking down GM CEO Rick Wagoner and the board of directors in the process, the parallels (or lack thereof) with GM’s own board of directors is stunning. Look what the task force has said about GM’s turnaround plan:

(1) Projections of slowing market share declines are way too optimistic given past history and plans to shutter more brands;

(2) Expectations on the profitability of GM cars is overstated given market conditions, quality image problems, and plans to make smaller and hybrid vehicles (which generate lower profits);

(3) GM’s European business has been losing money for a decade, yet the company wants to invest more capital there;

(4) The company is far behind in manufacturing fuel-efficient cars, and their hail-Mary (my words, not the task force) known as the Chevy Volt is a sure loser given its uncompetitive cost structure;

(5) Despite all this, to meet its legacy obligations GM will need to sell almost one million more vehicles.

The upshot of all this is that GM is almost certainly not going to return to profitability following the content, and pace, of their current turnaround efforts. And so the $64 billion question is this: Why did GM’s board of directors not deliver these harsh, but probably realistic, assessments to the management team? Why did the board allow GM to make a series of disastrous decisions for years? Why did the board stand by while one of the greatest names in American business fell apart?

The answer is that GM’s board did not take it upon themselves to set the highest of standards, did not carefully question and challenge the management team’s turnaround strategy and progress toward their goals, and did not behave in the highly vigilant manner required to fulfill their fiduciary responsibility to shareholders. Elsewhere I have suggested specific actions vigilant boards must take, and I have written about the types of biases that can push smart leaders to make bad decisions, and all are in evidence here.

This is a scandal of the highest order, but alas, it is a story repeated at Bank of America, Citigroup, AIG, and many other companies. So, while free market economists wring their hands in disgust at the extraordinary interventions of the Obama Administration, I for one say, it’s about time somebody paid attention. It’s about time there was effective vigilance and oversight of GM. And I hope other boards pay attention – what is our state of corporate governance such that the government does a better job of providing advice and oversight to managers than a so-called independent board of directors?