Never a Good Sign

The board of GM asked Fritz Henderson to resign as CEO. I don’t have an opinion on Fritz Henderson. But here’s the worrying bit, from the New York Times article:

“’Fritz was just not enough of a change agent,’ [a person with direct knowledge of the board’s deliberations] said. ‘The board wants a world-class C.E.O. and now they have enough breathing room to find one.'”

Having tried and rejected the inside option (Henderson was a longtime GM executive chosen to replace Rick Wagoner, who was forced out earlier this year), the board is certain to go looking for a superstar CEO from outside the company and probably outside the industry. The phrase “world-class CEO” is always a dead giveaway for delusion.

My favorite source on this is Rakesh Khurana, who wrote a book called Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, but since you can’t read a book for free online I’ll quote from a couple of his articles.

The number one pitfall in CEO succession, his research shows, is “missing the chance for organizational introspection.” In other words, it’s important to figure out what’s wrong with your company, not what you didn’t like about your last CEO.

Another common delusion is believing that a superstar CEO can turn around a bad company. As Khurana wrote in an op-ed article several years ago,

“Although we want to believe that a charismatic chief executive will be able to burnish even the most tarnished business, there is no conclusive evidence that a company’s top leadership actually has much impact on its performance at all. Studies show that external factors, such as general industry and economic conditions, have a far greater influence over a company’s results than does its chief executive.”

The basic issue is that the chances that one person will be able to transform a company of one hundred thousand people are pretty low. Yes, it can happen.  It’s also possible that your mutual fund manager can beat the stock market consistently without taking on additional risk. But another pitfall is “equating candidates with their past companies.” To be clear, I think there are many more good CEOs (meaning that they improve their companies) out there than there are good stock mutual fund managers. But having seen them from the inside, CEO searches also suffer from this bias.

Khurana’s op-ed discusses Jack Welch as the prototype of the modern charismatic CEO, and concedes that Welch was a successful CEO. And yes, GE’s stock has plummeted since Welch left. But a lot of that crash has been due to GE Capital, which Welch built up to be the major source of GE’s profits. I haven’t done a minute of research on this, but how much of Welch’s success was due to excessive risk-taking during a boom?

I know I’m a bit of a broken record on this, but it’s probably because of the time I spent in the world of technology startups. It is absolute conventional wisdom among VCs that founder CEOs have to be replaced by “world-class” external CEOs, and that the way to find a world-class CEO is to select among people who have already been CEOs. Yet many promising companies have been killed this way, and when you look at the huge winners, most of what you see are counterexamples — Bill Gates at Microsoft, Larry Ellison at Oracle, Scott McNeely at Sun, Tom Siebel at Siebel, Dave Duffield at Peoplesoft, Steve Jobs at Apple (compared to the outsiders of the 1980s and 1990s), Hasso Plattner at SAP, William Hewlett and David Packard at HP, Robert Noyce and Gordon Moore at Intel, etc.

Khurana also cites Warren Buffett: “Most academic research merely confirms Warren Buffett’s observation that when you bring good management into a bad business, it’s the reputation of the business that stays intact.” Let’s hope that GM proves Buffett wrong — especially since I believe we own most of it.

By James Kwak

36 thoughts on “Never a Good Sign

  1. This is textbook escapism, made all the more rote by America’s stu pid celebrity culture.

    GM has no basis to exist. Even if Peak Oil didn’t doom the auto industry in general, GM is simply too dysfunctional a behemoth to adapt to any kind of changed circumstances.

    I didn’t read about what happened with Henderson. (Having to read constantly about the zombie banks, to read about this pile of rusting junk is just too much.)

    But, when you have zero ideas (in this case, for the sufficient reason that there are no ideas out there for you), the American way is to pray for a leprechaun to bring you a pot of gold. By now GM is just an older, uglier version of Dubai. Hummers are no dumber than a ski hill in the desert.

    So they’re chanting “technology will save us”, and since no one can explain how that will happen, they figure “the mystical celebrity will figure it out.”

    It’s a delusion twofer.

  2. Buying anything from a government owned manufacturer is un-Amerikan. GM is dying a slow, miserable and very expensive death. $60-100B US taxpayer dollars pissed away.

  3. I work for Ford, not GM, but I get very tired of what passes for conventional wisdom about American automakers.

    Here’s what gets left out:

    From BusinessWeek: ” … Toyota is in talks to borrow a little over $2 billion from the state-backed Japan Bank for International Cooperation (JBIC) to secure funds for its U.S. operations. Toyota, which expects to lose $3.9 billion this year…”

    All other industrialized nations provide health care for their people. Only US companies — Ford, GM, and Chrysler — are expected to compete and to pay for health care for their workers.

    Toyota and other transplant automakers have next to no retirees in the US.

    The US has followed a policy that bulks up the financial sector while starving industry.

    As a Ford employee and a UAW member, I have no illusions about how poor and short-sighted many auto industry decisions have been, however these decisions mirror the short term thinking that led the crisis in the larger economy we now face.

    American auto companies are criticized — rightly I think — for relying too much on SUVs and pickups. If you see this as a sign of bad management ask youself this: what is the last plant Toyota built in the US? That’s right, the Tundra plant in San Antonio. They followed the profits too — just a little to late to cash in on it. Bad decison? Bad management? You tell me.

    Sticky accelerators. Fatalities. Slow to respond and fix the problem. Yep, that well managed companty, Toyota.

    I could go on, but you get the point.

  4. PMH–reading the post and the comments, I don’t think anybody is attacking the American auto industry. I read James to be making a very good point about the idiocy of outsiders to a business attaching themselves to glib slogans and doing mischief to a franchise through their arrogant ignorance–rather like the neo-Cons let loose in the Green Zone after a very successful exercise in shock and awe that was misunderstood as victory.

    FWIW, I’ve often wondered if the family control of Ford wasn’t an odd advantage to the organization over the years, not because it was particularly astitute (ahem) but because it insured that the destructive union-management dynamic never completely took hold. I think the Detroit car companies were more different than outsiders ever bothered to understand, and that fools in power who think that because an industry outsider has been doing a good job at Ford that medicine is right for GM are going to end up owning a politically embarrassing financial suicide.

  5. PMH-
    You make good points, but your discussion, like that of the government and most of the public, is focused solely on the cost side of the problem. Detroit has a serious problem on the PRODUCT side of the equation that keeps getting ignored.
    The reason GM lost money on every car was their cost structure AND the fact they had to undercut Toy-onda-san on price to even get their products considered by the buying public.
    Detroit has used cost as an excuse to cover for poor product (concept, design and execution in varying proportions) for decades.

    Maybe a smart CEO can get GM to make better cars. Mulally seems to have done a decent job moving Ford in that direction.

  6. I think one index of how poorly GM did things (implicating upper management and its captive directors) was managing to take three reasonably decent brands, and do them in. Opel was a fairly major player in the european market for years, Saturn was a reasonably good niche brand, SAAB once made innovative vehicles[note, I still think the 94 was the best small sedan made in postwar europe) and GM cheapened and ruined it. Ford did the same with Volvo. Remarkable how the genius of american management (packed to the gills with Harvard & Wharton MBAs)ultimately ran the firms into the ground.
    As to PHM’s comments that toyata, etc have no “legacy” costs (e.g. pension & healthcare expenses for retirees) one needs to remember that it was big 3 auto the fought (along with much of the rest of heavy industry and insurance) against national pension and healthcare schemes in the late 1930s!!!
    It would have been far better to dissolve GM and Chrysler (and probably Ford as well) and admit that the U.S. stands now where Great Britain stood in 1914: a declining industrial power

  7. Good management cannot save a failing company is true, but it is management and employees who make the company to begin with.

  8. Ross Perot tried to clean the place up years ago and they told him to take his football and go home. Poetic justice for GM here??

    If they have any gray matter left in the GM leadership’s Alzheimer’s infected brains, they’ll call Ross Perot up or visit his house in person, apologize in a very sincere way, and ask him if he was to choose 2 or 3 people to run GM, who would he choose??

    It also wouldn’t hurt if they chose somebody well-versed in the area of Quality Control since it was W. Edwards Deming and the Japanese automakers that helped speed up GM’s obsolescence and failure. Any famous students/disciples of Deming’s 14 points and ALL Deming’s teaching would be a gigantic step in the right direction for GM.

  9. It is very difficult to change corporate culture. It is even more difficult to change unions.

    It is still my opinion that we should not have bailed out anyone. We just keep losing as taxpayers, and create a culture of moral hazard.

  10. PMH — you make lots of great points here. The issue of health-care costs is a huge one, of course, and must put a massive burden on US auto companies. What I’ve often wondered is why, then, they haven’t been shifting more production into Canada, where the state picks up the cost of health care? Instead, they seem to close plants in Ontario as fast if not faster than they do in the US?

  11. Ronald Reagan didn’t seem to find it too difficult to break unions did he Mr. Merkel??? And those union contracts didn’t mean diddly compared to seeing Mr. Blankfein get his $67.9 Million bonus promised in his legally binding contract did it???

    After all, we all know Mr. Blankfein works twice as hard as the factory worker does, eh Mr. Merkel?? Or how many multiples of an auto-factory worker’s salary would $67.9 million be Mr. Merkel?? Don’t suppose you’re interested in doing the math on that are you?? What are you going to tell me next, that Lloyd Blankfein has added so much efficiency to our economy??

    A suggestion for Goldman Sach’s new marketing slogan: “Crime always pays, especially for bankers”

  12. That Perot link from 1988 was great. Many once-successful companies get very comfortable, lost the traits that got them there, and pull back into their holes to be sure to never lose. Once you play “not to lose”, as opposed to “to win”, you’ve lost the game.

  13. and i guess some haven’t noticed that the German’s autoworkers are the highest compensated. and oh by the way, both Japan and German autoworkers are unionized. as are the Koreans.

  14. the real reason GM and the others lots money was they had trained the customer to buy on incentives. their cost structure wasn’t to far off. but they are in a product dominant business, which means you have to have good products (or at least seem to) to sell with out incentives. the domestics fixed their quality issues long ago (but once you have that stench of bad quality it takes a long time to get past it).
    GM and Ford have some really good products, but nobody notices them. even Chrysler does, it just doesn’t have many.
    the domestics biggest problem is product designed to a price by accountants, not designers or engineers

  15. Bad management drives out good people. Sacrificial scapegoating generally begins at the bottom. Soooo….by the time the top guy gets offed you are left with a company of less than stellar performers. For a new CEO to really change the culture and turn a company around it is necessary to do some serious house cleaning starting at the top. Since selections from the inside tend to perpetuate the “good old boy” culture, this is often more easily done by someone coming in from the outside. The downside of the outsider being that it takes a bit of time to determine who should be saved…which leaves the option of throwing the babies out with the bath water and starting over.

    I worked for GE before and during the Jack Welch era. He did a magnificent job, however, there was still a lot of talent left in the company when he took over and he knew where it was and how to get the most out of it. Still, if GM really wants to turn the operation around, I would say get Jack Welch.

  16. well we have seen what a bad president (or dictator) can do haven’t we? after all we just spent the last 8 years with that experiment in progress

  17. lets see how long has GM had Opel? about 40 or more years? but you are right about one thing for some reason GM was much more interested in having do engineering work for south America than Europe. not sure why but some body thought that was the best use of their talent. Saturn started out ok, but its real problem was it never was invested in much (and it took money away from OLDSMOBILE and ended up killing both. not enough money to do both. SAAB in the US was never a big draw not sure why they wanted it. biggest mess was a decade or so ago some body thought investing billions in Fiat was a good deal. until they didn’t. not really sure why business is so against health care either since it will get that cost directly off their books (as almost nobody else has the same scheme we do. and it really does cost jobs when business has to do it). and allowing them to fail would have put us into the depression with no way out.

  18. sometimes it might have helped but in funny ways. the Ford family wasn’t about to let Ford get money from the Feds cause they would loose control if they did. but then there is the funny issues at Ford that seem to revolve around them. like family members getting promotions even when they fail. or that Henry Ford couldn’t stand any body else getting credit for things the company did right. and while Ford certainly picked a good new CEO, at least they came from a manufacturing background (Boeing).

  19. As with Dilbert they will probably find someone with “Executive Hair”. Don’t know if Naradelli counts on this score but since he has driven both Home Depot and Chrysler into the ground he will probably get a look see.

  20. If you want to understand why Henderson was axed look at the clowns dozing on the GM Board. The Company is now a political plaything. What will GM do next? My guess: hire a world class bul****it artist. Al Gore would be perfect! In five years America’s highways will look like France. Watch out for those eighteen wheelers. A tuna can would be safer.

  21. Farfetched—It May be Not—the Move has Been Signaled By Bank of America for Near-Term Downgrades to the Sector…

    Even the move by GM and all the changes brings a sense of urgency to these matters. Marcy Kaptur had said that many that caused this crisis would become untouchable

    On the thought of far-reaching, could an inverse affect the crisis by early repayment sought by Bank of America and others still owing upon TARP funds received? Even more puzzling as you had in the pieces of data to the puzzle, it becomes clearer to Bernanke and Geithner’s plans unfolding.

    The early repayment as announced by Bank of America and the action of diluted new issue of stock will cause the Shareholders to take the lion’s share of the risk again prior to the TARP distributions. These diluted shares give a good marker of the reason market is showing the serious signs for distribution by the big institutions. You are seeing the same under the radar movement by the foreign blocks locking in on their profits as well.

    The downgrades projected by Meredith Whitney several weeks ago are even more telling today. Her downgrades are even having stronger meaning than when made at the time everyone was calling her way off the mark. Whitney’s evaluations along with other proprietary reports have new evaluations for Bank of America, Wells Fargo, Citigroup, Goldman Sachs, JP Morgan Chase, and the ETF of the (XLF), just to mention a few. The main critical point from these reports are; “the highly valued condition of the financial sector is priced for no diluted shares in the current metric”, bringing the serious call again made by Meredith Whitney as timely.

    The downgrades have Bank of America with current repayment as just announced the evening of December 2, 2009 of setting a new short-term price based upon the diluted offering to make repayment in TARP of $12.34 near-term. Wells Fargo is seen near-term, if shares are diluted to a share price of $19.00 dollars. Goldman Sachs still has a horizon of between $132.67 and $145.86 downturn baked in from what has been learned.
    Morgan Stanley was read to be valued along with the market at $24.79 if TARP recipients make moves for repayment as triggered now by Bank of America’s announcement. JP Morgan Chase share price will also see an affect as read of $32.42 a share during the near-term. This is where the Exchange Traded Fund of the (XLF) has been revalued near-term to range between $11.28 and $12.98 a share near-term over the transitions of the TARP repayment scheme.

    What does all this mean to all of us taxpayers? It means for one, the Federal reserve of New York “The Fed Turns to Reverse Repos– Selling Some Securities back to Market; No Policy Change” was missed. This article appeared in Wall Street Journal on December 1, 2009 by MICHAEL S. DERBY. The direct-link is provided here:

    The street truly missed what happening by the statement is made that are very bold alerts to the American Taxpayer as well as now the Stock Markets that have had a free run up until now. Now there is very extensive risk being reintroduced into the market place by the private shareholders now holding the bag along with the American taxpayer still in the wings footing the interest payments on a reverse repo plan.
    The article key paragraphs are as follows:

    “The reverse-repo transactions the New York Fed says it will be undertaking are part of several options under consideration by the central bank. The problem faced by monetary policy makers is how to shrink a balance sheet that has grown massively over the course of the financial crisis, from just over $800 billion at the start of the troubles to its likely high-water mark of $2.5 trillion early next year.

    While policy makers are confident their ability to pay interest on reserves banks hold at the Fed will help them control the inflationary potential of the balance sheet, they nevertheless want to normalize their portfolio and find a path toward unloading their huge holdings of securities, which are largely mortgage-related” (Michael S. Derby).

    The problem with this bet becomes greater when the open market starts to believe collectively, the Federal Reserve and other central banks that are hedging the recoveries are developing even a higher risk than what can be seen on the surface of the current markets radar.

    These market professionals’ bets are talked by so many talking heads as not considered as extreme high-risk bets, but they believe any bets that they are making are unabated by the very thought of very limited if any risk on betting on the dollar to crash and the YAUN to remain depressed.

    This same thought as I wrote prior on was what pushed Russia into their collapse in 1998. The books are a great read on the impacts as further aggravated by the IMF during this financial crisis. Russia was in crisis and dismantled and eventually the IMF had to in act long-term rescue policies for the rebuilding of the entire financial system of a new divided Russia as posted in prior articles.

    Where is America going to be in the fall out of record liquidity injected to this current crisis and the flag rising revealing the plans to make repayment of reverse repos? How deep will the financial sector continue to bleed as liquidity is near record levels around the globe? These questions should concern many as they bring their hard-earned profits from the markets into safety during this next leg of the financial challenges ahead.
    Make no mistake about the alarms sounded by the Fed, China, the Asian Rim, and the Emirates of the Middle East showing the true fragileness of this delicate global recovery.

    You can say, “The War for Wealth has become a War for Survival”. Survival now for each nation faced with critical recovery issues of exposures that now have them needing to place the concerns of their very own financial survival before their neighbors.

    The concerns of the other nations are now around how they play this tricky Chess game of out flanking their opponents as they achieve a utopia called survival of the financial fittest.

    This game has though a serious and dangerous element at play. The China effect along with the massive unloading of World liquidity needed by many countries now will bring at what cost, a sustainable recovery metric of this world globalization recovery.

    The facts remain simple. The entire stimulus plans put into action by governments has open the faucet of untold amounts of deflation and powerful inflationary factors seen coming down the road. Potentials that this road can lead to a double dip recession or further yet, into the words that Ben Bernanke does not want to utter: “Great Depression” or the new term of, “going into the abyss of total collapse” as again voiced by Meredith Whitney and many others over the past few months.

    Not an easy task, for the nations at war for the Wealth of survival–Farfetched we do what one of the oldest professors of finance who taught so well, that all should learn from our mistakes and not repeat our pasts. This professor just died last Tuesday on November 24, 2009 at the age of 95 years old as I announced in a prior article post.

    Schroeder had said, “The current recipes being used by Bernanke and Geithner could be leading us dowYUANReposfragilestn a very dangerous path as Russia who once was a great super power nation that has been divided and changed forever as recorded by history.

    Schroeder taught us well to learn the simple facts of keeping highly leveraged and capitalized. To incorporate throughout the banking structures a solid risk management to shore the banking systems. I am in the camp of supporting an audit of the Federal Reserve’s books as the price of liquidity has become too great to ignore.

    Farfetched, Maybe Not! …

    James Gornick 12/02/2009

  22. I love your remark regarding distraction from appropriate introspection. It is so true. The Board of GM needs to decide on how its business model must be tweaked, or even dramatically changed, and then look for a CEO with the appropriate charisma (ala Jack Welch) who can get everyone in the management group AND the rank and file, to buy into the change. That choice should be open, quick, highly energetic and astute. Gosh, I am sure there is someone, and, even someone who might be interested in doing a Lee Iacocca.

    But it will be tough because of the load of baggage which will follow GM for the coming years (unless our economy does an unlikely miraculous turnaround). I am believing that luck will have to play a large part in it.

  23. As I remarked elsewhere a few weeks ago, I find it curious that the same people who believe in random walk markets also believe that CEO compensation is rational. As the saying goes, past results are not indicative of future performance. This does not mean that “world class” CEOs are just lucky, but ability is only part of performance. To get a “world class” CEO GM will have to pay through the nose. Odds are they can do as well for much less.

    “Let’s hope that GM proves Buffett wrong — especially since I believe we own most of it.”

    Why should we hope? If we own most of it, why not tell the board that they are barking up the wrong tree?

    My suspicion is that government officials have bought into the plutocratic world view. They think that the rich really are different, and therefore deserve to rule.

  24. We seem to have had the same thought at the same time. There is no easier way to announce “we are making changes” without actually making any difficult decisions than by changing the CEO.

    Tolstoy had the original criticism of this great man school of thought in his analysis of Napoleon at Borodino. However comforting it may be to believe that all problems are a management change away, far more often it is the case that any individual has very little control of success or failure.

  25. Mr. Kwak, ordinarily I agree with you. That very comment in the Times article caused me concern, but then I thought that it was a veiled reference to Carlos Ghosn. If GM could get him, would it be worth it?

    That’s not at all the same as a celebrated nonentity like Fiorina or the GE dwarfs.

  26. I fully understand the desire of the board to bring in a change agent. Henderson spent his whole career at GM, and his dad was a GM executive. Even though he had definitely executed in some prior positions, the guy bled GM blue. But your points on world class CEOs are spot on. After all Chrysler brought in Robert Nardelli, who was supposed to be world class, despite his Home Depot debacle, and he didn’t help them avoid bankruptcy.

  27. Was it not taught to the masses that the two most important qualities in a Hero CEO are:

    1. Always knowing when to get out of Dodge; and
    2. Always knowing how to get out of Dodge?

    Had Jack Welch stuck around GE any longer, a lot of his luster would be gone.

  28. It takes time to become an effective CEO for a business. Unless it’s a turnaround artist brought in simply to cut staffing levels on a short term basis and/or cream puff the financials for a sale or as a stalking horse for a new regime. Bringing in someone who was a success elsewhere does not mean he will be successful here, at least not right away. A good operating mgr CEO needs a good finance guy. A good finance guy who becomes CEO needs a good operations guy. Both have to know the particular business well. It helps to have a good informal info network within the company to stay successful. Those features of successful leadership don’t often travel well. A departing CEO is likely to be succeeded by his wingman, so one of the keys to his success is unlikely to come along with him.

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