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?