"How Rick Wagoner Lost GM"
By Professor Jeffrey A. Sonnenfeld
Published on BusinessWeek Online June 1, 2009
Read the article in its original context on the BusinessWeek website.
General Motors' legendary management system and industrial might were once revered by management scholars and business historians; the thought of bankruptcy would have been beyond improbable and indeed laughable. Yet now the automaker has joined the list of giants that have been forced to file for Chapter 11, and this once-unthinkable event is being met with met with cries for accountability.
When we look at the fall of General Motors, surely the culpability for failure can be attributed to a combination of factors: specific leaders' blind spots, the intransigent culture of the company, and a governance process that allowed those charged with oversight to agree to antiquated labor/management cost concessions and demonstrate a collective tin ear about consumer disdain, shareholder frustration, and analyst troubleshooting. However, despite complex institutional factors accounting for GM's collapse, Rick Wagoner, the CEO who reigned at the time of the bankruptcy, will be known as the man who lost GM.
Certainly, many observers would say the die was cast long ago by former CEO Roger Smith, who was behind the wheel from 1981 through 1990. Smith was just one of a long line of "finance men" selected to lead the engineers and marketing executives known as the "car guys" (a tradition that dated back to Frederick Donner in 1958). Smith's disastrous attempts to reorganize GM's bureaucracy in the 1980s had a lingering effect. A belated effort to respond to increasing Japanese competition in the smaller car market resulted in GM's introduction of the unpopular, unattractive X-cars.
The clustering of eight business units into a big-car and a small-car division was supposed to spark efficiencies and cross-divisional unity, but the result was internal sparring and lookalike cars with varied name plates. A $9,000 Pontiac was hard to distinguish from a $25,000 Cadillac. This was especially disastrous to the luxury market, where GM resorted to bumper extensions and extra chrome for cosmetic decorative differences instead of authentic mechanical, electronic safety, and efficiency advances. As GM's market share fell, its plants had tremendous excess capacity.
By 1989, GM was losing more than $2,000 on every car it built through the organizational restructuring. In an effort to race new models into production faster, quality standards plummeted under Smith. In 1989 he launched the innovative Saturn division with unrealistic expectations (it needed to sell an unattainable half-million cars a year to break even) while allowing Saturn to cannibalize from existing GM brands. Smith squandered billions more through the misguided acquisitions of EDS and Hughes Aircraft.
He nonetheless survived despite shareholder outrage, analyst condemnations, media criticism, and downright ridicule in Michael Moore's blockbuster film Roger and Me.
Smith's secret weapon was his ability to manipulate GM's board, which he had packed with three top subordinates as well as public figures such as Ambassador Anne Armstrong, social activist Reverend Leon Sullivan, two academics, and GM's local Detroit banker. Full board meetings were ceremonial ratification events as the Smith-controlled committees provided whatever review was required. I knew Roger Smith, and even in informal, off-the-record gatherings, I always saw him flanked only by protective staffers.
The sorry state of corporate governance at GM was described in an internal 1988 memo by former Vice-Chairman Elmer Johnson (whom I knew well), who was recruited from GM's outside law firm: "Our culture discourages open, frank debate among GM executives in the pursuit of problem resolution. There exists a clear perception among the rank and file of GM personnel that management does not receive bad news well…our most serious problem pertains to organization and culture." Johnson complained that GM was imperiled by a 1950s mindset of "a very stable, predictable world" and "a culture not prepared to deal with new realities," with GM's overwhelming competitive advantage being its "monumental economies of scale."
That same year, former GM board member Ross Perot complained: "At GM the stress is not on getting results — on winning — but on bureaucracy, on conforming to the GM System. You get to the top of General Motors not by doing something but by not making a mistake."
A top GM decision-maker for 17 years
Given GM's cultural hindrances, Rick Wagoner's weak predecessors, and the perilous economic times, does this mean Wagoner, an honest, likeable fellow, is exempt from blame? Not if we think of CEOs as possessing transcendent leadership qualities. He led as CEO from 2000 to 2009 and as President or CFO since 1992 — 17 years at the controls as GM careened toward the cliff, failing to brake.
This is not the first time GM has faced tought times. Soon after William Durant, a former carriage engineer, founded GM in 1904, he drove the company into several potholes — even then needing large bailouts by its bankers. Hitting economic distress a decade later, Durant lost control of the business to Pierre Du Pont — who in turn instituted needed financial discipline and accountability. In 1923, Du Pont turned over the keys to the ingenious Alfred Sloan, who introduced style and design to auto manufacturing as well as a sound management structure.
Rick Wagoner proved to be no Pierre Du Pont or Alfred Sloan. In fact, the affable Wagoner can be judged more harshly than the vilified Roger Smith since Wagoner had Smith's public lessons to draw from. But rather than learn from them, Wagoner repeated them. For example, Wagoner's immediate predecessor, the short-term transitional figure Jack Smith, served as CEO while former Procter & Gamble (PG) CEO John Smale served as chairman. This revolutionary separating of the CEO and chairman roles (and the consequent addition of truly independent directors) allowed the board to pursue an agenda wrested from management's control.
Yet these reforms, inspired by attorney Ira Millstein, were rolled back under Wagoner. He recombined the chairman and CEO roles, assuming greater board control. He then packed the board with sympathetic voices, including four fallen CEOs from other companies, and ceremonial, nonbusiness figures. With the exception of two or three truly independent voices (especially the courageous surviving directors Kent Kressa and Neville Isdelle), the emotionally conflicted larger board circled the wagons to protect the CEO when legitimate criticisms arose, much as Roger Smith's board did.
This board rubber-stamping allowed Wagoner, a product of GM's dangerous cultural mindset, to drive the company back into past calamitous potholes. Consider this sampling of missteps on Wagoner's part:
- He lost $82 billion in just the past four years, and cash management was so poor that five years ago, GM's debt was properly downgraded to junk-bond status.
- He made astoundingly bad product decisions, such as supporting the poor-selling Pontiac Aztek and cancelling GM's early move into hybrids. And Chevrolet could have been marketing the Volt a decade earlier than it did, thanks to the prescience of Robert Stemple, a Wagoner predecessor who as CEO from 1990 through 1992 greenlighted the development of the EV 1, the first electric car.
- In 2002 he ignored urgent trends to focus on car development while reaping 90% of profits from pick-ups and SUVs.
- He maintained too many divisions and too many lookalike products.
- He was under-responsive as the economic crisis revealed itself, cutting production only 25%, while Ford cut more than 45% in the first two quarters of this year.
- He squandered great names like Saab, Opel, Saturn, and Hummer by not properly investing in them and hoping instead to harvest past initiatives and covertly transplant core GM car platforms.
- He led a misguided joint venture with Fiat that cost GM $2 billion to extricate itself from. He allowed GMAC, when he controlled it, to bathe in the subprime lending market with its disasterous RESCAP subsidiary. Contrast that with the strategy of Ford (F), which got out of that high-risk lending in 2002.
- He sold GM's valuable GMAC internal financing arm to Cerberus, which also controlled GM competitor Chrysler. In December and January, Cerebrus basically stopped writing retail finance contracts to support GM buyers.
- He pursued plans to purchase Chrysler, drawing on an anachronistic mindset that saw virtue in bulk operational size and scale efficiencies rather than profits, quality, and reputation.
Wagoner continually went before the American public and Congress unprepared and angry, demanding taxpayer support without ever being able to articulate why he wanted $25 billion, how the company would use the money, and what GM's vision was for a future viable enterprise.
Rick Wagoner had the potential, the intelligence, the experience, and the education to be an Alfred Sloan, a Pierre Du Pont, a Carlos Ghosn, a Lee Iacocca, or even an Alan Mulally, but instead he chose the path of William Durant and Roger Smith. That his poor performance was rewarded with a 64% jump in total compensation, from $9.57 million in 2006 to $15.7 million in 2007, is a disturbing testimony to how far GM's once-revolutionary board reforms had retreated. Many shareholders have lost their investments, many workers have lost their jobs, and this nation has lost needed industrial might.
The free hand Wagoner had to make so many poor choices is an indictment of GM's board. But the choices he made speak to Wagoner's bad judgment when his company most needed him. "Engine" Charlie Wilson — a GM CEO in the 1950s — may have been on the right track when he said: "What is good for General Motors is good for the U.S." Rick Wagoner was not good for GM — and he was not good for the U.S.
Jeffrey A. Sonnenfeld is the Senior Associate Dean of the Yale School of Management for Executive Programs and Lester Crown Professor of Management Practice as well as co-author of Firing Back: How Great Leaders Overcome Career Disasters. He can be reached at email@example.com.