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The Roundup June 1

A bankruptcy for the history books.

General Motors Corp., which for much of its 100-year life was the world’s largest automaker and the pinnacle of corporate America, today filed for bankruptcy reorganization in an attempt to rebuild itself as a smaller and leaner automaker.

(“GM files for bankruptcy protection,” Detroit Free Press, June 1) Let’s sum up all the bits and pieces. After 84 years as one of the 30 stocks listed on the Dow industrial index, GM has been removed and replaced by Cisco — happened a couple hours ago. GM stock is now trading at 57 cents a share, down from 75 cents on Friday.

In the bankruptcy petition, the company outlines 14 plant closures and 3 parts distributors by 2012, bringing the company to full manufacturing utilization by 2011. The U.S. federal government will get a 60% stake in the reorganized GM in exchange for an additional $30.1 billion in financing, and bondholders, who are owed $27 billion, 10% with warrants for an additional 15% in exchange for forgiving the debt. The governments of Canada and Ontario will inject $9.5 billion in exchange for $1.7 billion in debt (and preferred shares) and 12% equity stake in the company.

While it’s uncertain how the debtholder, Canadian, or VEBA GM owners will approach corporate governance, the Obama administration is committing itself to a hands-off, passive ownership stake (imagine passively owning 60% of any company!) with ownership rights only exercised in the direct election of board members. The government will not even have representation on the board of directors.

This, in my opinion, is a lost opportunity. There is no question that we are weathering an ongoing major business crisis fueled by corporate governance dysfunction. Enough ink has been spilled on corporate governance reform to fill all the pools in Beverly Hills. In short, corporate governing boards are staffed by directors hand-picked by CEOs and upper management, who are subsequently totally dependent on information provided by company management, are in many cases amateurs at governance, and, most importantly, do not have a sufficient stake in the outcome to question or stop management before disaster hits. What we’ve seen from the savings and loan debacle to Enron to GM are corporate boards that willingly ride the train to disaster and then pick up the pieces.

Instead, we’re going back to the corporate governance model that got GM into trouble in the first place — where the managers essentially govern the company because they essentially “hire” the corporate directors.

There are several ways to muscle up corporate governance and prevent future GMs from happening — and protect taxpayers both from bailing out failed companies on the one hand and suffering job loss and economic uncertainty on the other. Many or all of these basic corporate governance reforms could have been put in place by the Obama administration as the stewards of the country’s 60% ownership stake in the company. But in an effort to placate vocal conservative critics crying “socialism,” the Obama administration is eschewing fundamentally sound capitalist principles.

The first is to instantiate rules now being considered to allow significant owners to nominate directors. Structuring the GM board to allow all equity owners with stakes over 1% to nominate directors (this would be the U.S., Canada, Ontario, some debtholders, and VEBA). Such a structure would make it far easier to start selling the federal government’s equity in the company, provided that rules are in place to prevent owners from deliberately creating a board that will blow up the company.

The second is to start thinking of directors as a professional class, something I’ve been loudly advocating since 2005. Currently, directors are drawn from upper management from other companies or cherry-picked from among well-known or well-placed amateurs (Erskine Bowles is on the GM board). This means vetting directors based on their performance as directors. Most significantly, however, it means increasing their stake in corporate outcomes. For instance, director compensation could and should be 100% marked to long-term corporate performance metrics, including but not limited to stock price. When a board is simply a sinecure, it’s no wonder that nuclear melt-downs like Enron, WorldCom, or GM can happen.

Finally — and I’ve never seen this discussed before — the Obama administration can muscle up the GM board by making it function like a separate branch of government. This means creating a board staff of independent consultants, auditors, and analysts whose job it is to independently evaluate the company and reports from management — a kind of in-house captive consulting firm of a dozen or so employees. Currently, boards are dependent on bringing on consulting firms when they need arms-length evaluations or audits. Actually staffing a board with what would be a stand-alone captive consulting firm — in the way Congressional offices are staffed — will go a long way to amend the chumminess and relative passivity of boards.

I have just finished an afternoon with Stephen Bindman’s rambling and editor-free screed, Pseudo Capitalism. He makes one very fruitful and lasting point — managers are in control of most of the U.S.’s assets, not owners. In all my years in marketing, business, and consulting, the difference between the way an owner governs a business and a manager governs a business is like the difference between Earth and Mars. We have set up a system where corporate governors, who are supposed to act as representatives of owners, act instead as pals and enablers of managers — largely because they themselves are drawn from the management class, not the ownership class.

It is a given in corporate governance reform circles that if directors were drawn more from the owner rather than the manager class and truly acted as representatives of owners, disasters would be averted early and blow-ups like GM, Lehman, Citigroup, Enron (and the beat goes on) wouldn’t happen.

Remember: the bankruptcy of GM is just as much the fault of the corporate directors as the managers — in fact, more so, since their job was to make sure management didn’t make long-term business-killing decisions.

But good, active, strong, and truly independent corporate governance representing owners rather than managers would, according to Republicans, be socialism. So Obama is passing on this once-in-a-lifetime golden opportunity to do corporate governance right.

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  1. [...] GM sets out on a fresh start,” Financial Times, July 10) There were a few missed opportunities, and I’m still not convinced the GM bailout helps the industry retool for a post-carbon [...]


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