Former Chrysler CFO Jerome B. York has scarcely been on General Motors' (GM) board of directors for 24 hours, but already his influence is being felt. On Feb. 7, GM announced changes that strongly indicate GM Chairman and CEO G. Richard Wagoner Jr. is taking York's advice.
In a speech last month, York, who is top deputy to billionaire investor and 10% GM shareholder Kirk Kerkorian, said GM's top executives should take a pay cut. They will, GM declared. York wanted salaried workers to make a sacrifice, and Wagoner has now capped their retiree health-care benefits. Now they will have to pay for any health-care inflation above their current coverage. York also wanted to cut the $2-a-share ($1.1 billion) dividend in half. GM's board did it (see BW Online, 1/11/06, "Kerkorian's Road Map for GM").
The only things on York's to-do list that haven't been announced are giving earnings guidance to Wall Street, demanding that the United Auto Workers union give more cuts than they already have, and selling off the Hummer and Saab lines. With the exception of putting the two brands on the block, the rest will come sooner or later.
FAST ACTION. So is Wagoner getting a script from York? Only partly. Wagoner may not have moved this quickly on some of these actions had York and Kerkorian not pressured management. Says Wagoner: "The fact that Jerry spoke about them highlights the fact that we needed to do them."
But some of the actions announced on Feb. 7 clearly weren't made just to impress York and Kerkorian. GM is capping the payout on its salaried retirees' medical-care plan, which will cut its $63.6 billion long-term health-care liabilities by $4.8 billion and shrink expenses by $900 million. GM Vice-Chairman and CFO Frederick A. "Fritz" Henderson said the company had already been working on those cuts before York's speech.
The other moves look like York's handiwork. Both Henderson and GM Vice-Chairman Robert A. Lutz expressed reluctance to take pay cuts after York's speech last month.
Those two, along with outgoing Vice-Chairman John M. Devine, will take a 30% hit. All three will take a pay cut of more than $500,000 this year, but still earn a little more than $1 million. Wagoner will see his pay cut in half to $1.1 million. "We thought it was the right thing to do," says Henderson.
SHARING THE PAIN. As for the dividend cut, GM's board typically reviews the dividend at its February meeting, but it can decide to cut it at any time. And after losing $8.6 billion last year, it would be a remarkable coincidence that the company cuts it less than a month after York suggested it.
Insiders say Wagoner's goal isn't to impress York. What he really wants to do is show the UAW that it's crisis time, and everyone from the chairman to the factory hand with the lowest seniority must share the pain to get the company back to profitability.
That makes sense. GM just announced the last of its union concessions in December. Less than two months later, the auto maker is announcing that executives, white-collar workers, and shareholders also will take a hit. It's Wagoner's way of telling the union rank and file that after months of negotiating give-backs, UAW President Ron Gettelfinger got everyone else to give, too.
LOOKING FORWARD. What's next? The current labor agreement with the UAW expires in September, 2007, a focus point for hammering out a future contract. Wagoner has not only set the stage by showing sacrifice from everyone, he may have also signaled something he wants.
J.P. Morgan analyst Himanshu Patel said in a research note after the announcement that capping retiree health-care benefits could be a blueprint for what GM will ask the union for in the next contract. That is looking more and more likely.
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