GM board shows CEO who sits in driver's seat

Directors want Rick Wagoner to come up with a tougher plan for reversing sluggish sales or he may be out.

01:00 AM EDT on Sunday, April 17, 2005

BY JOHN LIPPERT
Bloomberg News

General Motors Corp. directors may be showing signs of losing patience.

One signal emerged in December when the automaker's board approved chief executive officer Rick Wagoner's request to spend $2 billion to dissolve an alliance with Fiat SpA and additional cash to cut GM's European work force.

Then, according to a person familiar with the situation, directors told Wagoner, 52, not to ask for more spending to restructure Europe, where GM already had sustained losses of $3 billion over the prior four years.

GM's situation has deteriorated since then. First-quarter U.S. sales fell 5.1 percent, while Toyota Motor Corp.'s rose 9.1 percent. Some directors have sought counsel from a friend, former GM CEO John F. Smith Jr., according to another person familiar with the situation. And the board has asked Wagoner to present a tougher plan for fixing U.S. sales, others familiar with the situation say.

"Rick thought he could make it with incremental steps," said Eugene Jennings, a business professor emeritus at Michigan State University in East Lansing. "He underestimated his competitors."

Wagoner slashed his 2005 earnings forecast by more than half, to a range of $1 to $2 per share, on March 16. But GM shares have declined 33 percent this year, compared with an 8.3-percent drop in the Bloomberg World Auto Manufacturers Index.

Now, the board is likely to wait a year at most before considering whether to find a new CEO if results don't improve, said Jennings, an adviser to U.S. corporate boards for 40 years.

Detroit-based GM, the world's largest automaker by sales, declined to make its executives or directors available for interviews. Smith, 67, did not respond to requests for comment.
"The board is fully informed of all our strategies and, on that basis, supportive," Wagoner said on a March 16 conference call.

Among GM's board members are those familiar with corporate restructurings, including Stanley O'Neal, 53, chairman of Merrill Lynch & Co., and retired Northrop Grumman Corp. CEO Kent Kresa, 67.

George Fisher, 64, the former Eastman Kodak Co. CEO who is head of the automaker's governance committee, has been a GM director since Dec. 2, 1996, 11 weeks before Kodak shares reached their all-time high of $94.75 on Feb. 19, 1997.

General Motors spokesman Tom Kowaleski said Wagoner's relationship with the GM directors hasn't changed since he became board chairman two years ago after being named CEO in 2000. "Our board and our management continue to work together closely to make the right decisions for the company," Kowaleski said. He declined to provide details of Wagoner's discussions with the board.

Wagoner already has accelerated moves to boost GM's profit, including the March 1 appointment of Mark LaNeve as head of North American sales. LaNeve helped spark an 8-percent improvement in Cadillac sales last year. On April 4, Wagoner took direct control of North American operations and reassigned Gary Cowger, 57, the unit's president, and Robert Lutz, 73, its chairman, to other duties.

Wagoner's plan since becoming CEO five years ago was to revitalize GM's U.S. brands one at a time, starting with a $4-billion investment in Cadillac in 2001.

He pushed for higher productivity, too. In 2003, GM needed 23.6 labor hours to build each vehicle in North America, or 6.3 hours more than industry-leading Nissan Motor Co., according to Harbour Consulting, a firm in Troy, Mich., that focuses on efficiency. The year before Wagoner took charge, in 1999, GM trailed Nissan by 10.1 hours, according to Harbour.

Wagoner also sought to boost overseas sales through alliances with companies such as Shanghai Automotive Industry Corp., China's largest auto manufacturer

But activism has been a hallmark of the GM board in the recent past. In 1991, amid a recession sparked by the Iraqi invasion of Kuwait, General Motors' North American operations lost $7.1 billion. The directors then ousted chairman and CEO Robert Stempel and replaced him with Smith in 1992. In November 1992, Smith promoted Wagoner from head of Brazilian operations to chief financial officer.

Today, General Motors is in the top 1 percent of its industry peers in a governance ranking by Institutional Shareholder Services, the largest U.S. corporate governance adviser to fund managers. Rockville, Md.-based ISS rates companies on, among other things, whether non-employees sit on their boards, whether shareholders can raise issues at annual meetings and whether executive pay is excessive.

Even so, GM's continuing U.S. market-share decline -- to 25.8 percent in this year's first quarter from 26.8 percent in the year-earlier period -- is causing some investors to grow impatient with the board, said Pat McGurn, executive vice president of ISS.

"A mini-revolt might arise at the company's annual meeting that reflects these views," McGurn said. GM shareholders meet in Wilmington, Del., in June.

Nell Minow, editor of the Corporate Library, a governance adviser based in Portland, Maine, gives the GM board a "C" grade for overall performance. The directors failed to cut Wagoner's pay fast enough as the automaker stumbled, and they hold only token amounts of GM shares, she said.

Wagoner received $12.8 million including salary, bonuses and stock options for 2003, a 13-percent decline from the prior year, according to company filings. GM's profit from continuing operations fell 19 percent in 2003 to $3.2 billion.

General Motors plans to announce Wagoner's 2004 pay this month. As the directors seek solutions to concerns such as rising health costs, they should remember Lee Iacocca, who went to work at Chrysler Corp. for $1 a year plus stock options in 1978, Minow said.

"GM is not in as dire a position as Chrysler," Minow said. "Nevertheless, something like that would dramatize how sweeping the GM turnaround would have to be."

GM's health costs are set to hit a record $5.6 billion this year. During talks with the Detroit-based United Auto Workers union in 2003, Wagoner agreed to limited health-care changes after concluding that the risk of a strike serious enough to undermine productivity gains was too high, said Sean McAlinden, an analyst at the Center for Automotive Research.

Efficiencies have allowed the company to cut U.S. hourly employment from 125,000 in 2003 to 106,000 at the end of last year. Wagoner's caution was a mistake, since rank-and-file workers didn't expect their health benefits to emerge unscathed, McAlinden said.

UAW workers currently pay 7 percent to 10 percent of their health-insurance costs, compared with 20 percent for GM's white-collar workers and 40 percent for Americans generally, according to union data. On Thursday, top GM executives met with UAW leaders outside Detroit, partly to try to convince them of the growing danger posed by rising health costs. Union officials said afterward that the company and the UAW would work within the current labor contract to reduce health costs and that GM hadn't asked to reopen the four-year contract, which expires in 2007.

John Weaver, who manages $800 million of bonds, including GM debt, said the board needs to push Wagoner so that he, in turn, can take a harder line with the UAW.

"They should tell the union they won't be making cars if these gold-plated health benefits continue," Weaver, a fund manager at McGlinn Capital Management in Wyomissing, Pa., said before the union meeting unfolded.

Armando Codina, CEO of Florida's largest commercial real estate firm, closely held Codina Group, may emerge as an activist on the GM board, Minow said. In 2003, Codina was a leader among AMR Corp. directors who forced the resignation of Don Carty, chief executive of American Airlines, Minow said. As Carty sought wage concessions to avoid bankruptcy, he angered union leaders by failing to disclose executive bonuses.

GM's directors may have to change the structure of the company if its debt rating is lowered to high-risk or junk status, according to a March 24 report by Merrill Lynch. Specifically, General Motors Acceptance Corp., the company's finance unit, may be forced to sell its residential mortgage and insurance units, which together are worth three-fourths of GM's $16 billion in total market capitalization, the report said.

On April 5, Moody's Investors Service lowered GM's debt rating to Baa3, one level above junk.

The Merrill report is notable in part because O'Neal, Merrill's chairman, is a GM director. O'Neal and his father worked at a GM assembly plant near Atlanta. The automaker paid for his college education and hired him at its New York treasurer's office in 1978.

After the U.S. stock market bubble burst in 2000, O'Neal took on his own restructuring chores, eliminating 14,800 jobs and closing 266 Merrill offices worldwide.

This article originally appeared in the Providence Rhode Island Journal.