How Rick Wagoner Lost GM

GM's ex-CEO threw out the good-governance structure in place when he took over, then made bad decision after bad decision, backed by his rubber-stamp board

By Jeffrey A. Sonnenfeld

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 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.

Quality Plummeted

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."

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