GM's Board Says No to Magna et al.

GM’s board’s U-turn on strategy was a jolt to many, not the least the apparently unhappy German government that thought they had a different deal in place. After further consideration, the board flexed its muscles and said no, a gutsy and controversial move to be sure. What does this episode tell us about boards and strategy?

Perhaps the most important lesson is this: boards have a fiduciary responsibility (in America) to do what they deem necessary to protect and grow shareholder value. Signs of economic recovery, the waning of panic in the boardroom and executive suite that dominated thinking in GM’s darkest hours, and a deeper analysis of what strategy this company needs to execute a turnaround all played a role.

While the circumstances were different, one can contrast GM’s decision to renege on a deal with Bank of America’s experience with Merrill Lynch. The B of A board also felt tremendous pressure to move forward on a deal – the acquisition of Merrill Lynch – that was damaging to shareholders, yet they didn’t muster the courage to take on the US Treasury. So what’s the right thing to do?

Boards and management teams absolutely have the right to change their minds – how could they not? However, under “normal” business conditions, such dramatic policy shifts might signal turmoil among executive decision-makers and a house that can’t figure out what to do. The price such a board or management team will pay may be high. Just a few years ago then-CEO of Tyco, Dennis Kozlowski, announced a breakup of the company only to quickly revoke the move, triggering a pivotal downward shift in the market’s perception of his credibility.

What’s different here is that GM’s board is newly empowered, has the implicit support of the US government, and as a result has adopted an almost “devil may care” attitude. Save GM, and nothing else matters. Of course, there will be a price to pay down the line for this cavalier approach to important stakeholders, but that is the long-term and right now GM is focused on survival and not worrying too much about collateral damage. And they’re right.