Category: Financial crisis


The King is Dead! Long Live the King!

April 1st, 2009 — 9:51am

Night before last, I was watching AC 360, the Anderson Cooper news show on CNN. Anderson asked David Gergen, the former advisor to four presidents and current member of CNN’s team of political analysts, and two others, about the summary dismissal of Rick Wagoner. Mr. Gergen was generally supportive of the government’s position, but was critical of the fact that the government had forced Mr. Wagoner out, given that he had made progress in transforming GM.

Well, readers of this blog probably anticipate my reaction well: Firing Mr. Wagoner was not only necessary, but essential. So, let me take on the David Gergen’s argument. Imagine, for a moment, that a President of the US (whom I’ll henceforth refer to by the customary acronym POTUS) was at the end of an eight year tenure and he (think of Mr. Obama for now) had not been able to turn around the economy. Would you call him a failure? Sure you would!

Mr. Wagoner has been CEO for 8 years; prior to that he was GM’s CFO, President of North American Operations, and COO. A comparable track record in US national politics would have been Secretary of Treasury, (a hands on) Vice President and then POTUS. In effect, Mr. Wagoner had many more then 8 years to fix GM. Under the circumstances, the fact that he might have “made progress,” is simply not good enough! He has not delivered on the most important issues – GM’s culture, organization and strategy – and indeed, according to published reports chose to bypass these fearing that they would keep him from improving GM’s cost structure.

One of the other guests on the CNN program, an economist who supported the firing, pointed out that GM and Chrysler are so large that they account for almost 2% of America’s GDP. Consider this data point from a different perspective. We want our POTUS to turn around 100% of the GDP (while battling non-economic problems like wars, natural disasters,) and — by recent public criticism — do it in his first 100 days. Yet, we are OK with a very highly paid executive not being able to turn around a company in eight years that is only about 1% of the GDP?

Focusing an 8+ year role at the top on labor costs is leadership? Not in my books. Labor accounts for only about 8% of the cost of a car and on a global basis, as economist and journalist Ben Stein has pointed, even this cost is not wildly uncompetitive. But wait, he hired Bob “Mary Antoinette’s Soulmate” Lutz as Vice Chairman for Product Development and they turned out a few good cars, did they not? A few cars among how many? And what did GM do on core new technology? Oh yes, it caterwauled about unreachable mileage standards. Surely they were producing cars for Europe, where generally the laws are tougher and an End of Vehicle Life law already exists demanding near total recyclability?

No, the issues Mr. Wagoner chose to bypass – GM’s culture, organization and strategy – are the ones which could have saved the company. Had he broken down the Not Invented Here silos that existed within geographic and brand specific fiefdoms, he would have transferred innovations faster. Heck Saturn’s “no haggling” policy could have transformed the industry, instead of remaining a niche strategy. But that would have meant engaging with GM’s vast network of dealers in a new way. Think this does not matter? Then consider this: a couple of months back Hyundai came up with a brilliant idea to stimulate sales by addressing the fear consumers have about the economy. About the same time, I articulated a similar strategy in a radio interview I did that aired in the Boston market. How long did it take GM to do something similar? Until earlier this week!

The King is dead. I hope the new King – or kings, as I have argued earlier – come from middle ranks or better yet, from outside the industry. Ford’s Alan Mulally, after all, has been making faster progress and has so far, not had to reach for the begging bowl.

Comment » | Business Environment, Company Performance, Corporate Culture, Financial crisis, Leadership, Organizational structure, Politics

The Lessons of Camelot

March 19th, 2009 — 3:43pm

I have been trying desperately hard to stay away from politics. But the global financial crisis has made this impossible: virtually every business issue is singed, if not actually charred, by the blaze of the crisis. So, with the deepest of regrets …

Imagine President Obama, announcing at his press conference today that the US Special Forces had arrested Osama Bin Ladin. I would bet good money that the first question he’d get would be, “That’s great, but what about the AIG bonuses? Haven’t Americans been duped enough?”

Near the end Alan Jay Lerner’s musical Camelot, Guinevere and Lancelot offer to surrender and return to England to face justice. Arthur spurns them; his people no longer wanted justice, he says, they wanted revenge. Right now, the American people want revenge. They don’t want to be told about the contractual law, they want someone on Wall Street to feel real pain, just as they are feeling it. Bernie Madoff would have been a great fall guy, but he refused the part written so perfectly for him and pled guilty quickly. The people at AIG Financial Products Division, seen to be holding the country to ransom and getting away with it, have therefore become the focal point of public rage. They are making GM’s now departing Vice Chairman Robert Lutz (see my post “Marie Antoinette’s Soulmate”) look like a paragon of virtue. Which is why no one rebuked Republican Senator Grassley for calling on them to commit hara-kiri.

If President Obama does not display absolute, visceral rage – merely feeling angry won’t count – he seriously risks losing the people. Don’t believe me? Remember the effect on Michael Dukakis’s presidential campaign of his calm response to the question about what he would do if his wife and daughters were raped and murdered? His calmness, combined with his opponent’s blatantly racist campaign, doomed him. Today, similar conditions are present and the stakes are higher.

If Mr. Obama loses the people, the economy will slide into depression. This crisis in our networked world, as I have argued in earlier posts, was aggravated by a failure to manage as if the network matters. Ergo, resolving it will require tackling the ailings of the entire network, not just one of its nodes. Mr. Obama’s multi-sector bailouts and his plan to totally restructure multiple key sectors is exactly what is needed. But if the American people focus on only one node (AIG) of the network, he has no chance of succeeding. The good news is that as a master politician, he publicly repudiated Mr. Geithner’s position that the bonuses are a fait accompli. Now, he should take this repudiation to the next level and get some Hollywood types to teach him how to act furious on camera.

Substantively, Mr. Obama should outsource the work the AIG group does. These people are smart, but unlike Albert Einstein, they are not unique: The very products they used to peddle required them to work with equally smart people in other institutions. They are not unique! So, it is possible to fire them and simultaneously (this is key) introduce an outsourcing firm to take their place. The replacement firm could be one of the companies that participated in this market, but which currently have no (or minimal) such open contracts. If on top of this, the outsource firm were from a lower cost economy, so much the better: Wall Street can’t complain of being subject to the “market discipline” that they urge on others – and the American people would love the irony. (Incidentally, Wall Street already outsources a lot of work to India, albeit very quietly.)

Additionally, Mr. Obama should publicly and forcefully ask the organizations that provide the credentials job – CFAs, CPAs, NASD Series 7, JD, etc. – essential for a Wall Street to decertify (under morality clauses) those at AIG who brought disrepute to their profession. He should explain to Americans that this will deprive these people of their livelihoods in the world of high finance. Not quite Bernie Madoff’s fate, but definitely the equivalent of banishing Mordred from Camelot. Of course, if these people not only repaid this year’s bonus, but also contributed their entire last year’s bonus to charities that are working to help those who lost their jobs and homes, they might, just might, be able to retain their credentials.

I often tell executives that instead of battling a culture, they should focus on skillfully using the elements of the culture that can help them achieve their key goals. That’s what Mr. Obama must do now. In the final analysis, Arthur lost Camelot, as my teenager astutely told me the other day, because his knights saw peace as boring. He could not hold on to their passions and lost their support.

Mr. Obama must take steps that the Puritans of New England, the gun slingers of the Wild West, the Rhett Butlers and Scarlett O’Haras of the South and the flower people (yes, there are still many of them) of the two coasts appreciate. Stated differently, he must apply the lessons of why Camelot failed. Only then will he be able to fulfill his dream of taking the country back to Camelot for a sustained period of time.

Comment » | Business Environment, Financial crisis, Leadership, Politics

Oh What a Tangled Web do Politics Weave …

February 28th, 2009 — 2:55pm

A few days ago, I read a newspaper article on Secretary Clinton’s Asian trip. In China, she urged the Chinese to buy American debt, arguing that if they did not, China itself would be badly hurt: The recession-bound US economy would not be able to absorb Chinese exports. I found Ms. Clinton’s argument refreshing from one perspective: she eschewed the typical diplomatic mumbo-jumbo, admitting the US was in deep trouble. How the Chinese will react is an open question, particularly given President Obama’s budget. They may see merit in Secretary Clinton’s logic or may consider it as an invitation to throw good money after bad.

If American debt is a good investment, so are real estate and companies. National Public Radio recently ran two stories about organized groups of ordinary, albeit wealthy, Chinese who are visiting the US to buy real estate. So, that raises the question: how will the broader American political establishment react? For long, instinctive xenophobia has greeted investments from outside Western Europe. In the 1980s, the Japanese were demonized. More recently, the Chinese and Arabs were. Even Indians – who, like the Japanese, don’t pose obvious political problems for America – are attacked; a trivial example: The Taj Group’s purchase of Boston’s Ritz Carleton Hotel produced in the Boston media opinions that made me cringe. Never mind that Taj’s CEO is an American and its luxury hotels are among the best in the world!

Every economy should protect itself from harm. At the Darden School, I silenced Ayn Rand capitalists in a managerial economics class by pointing out that objective data showed that semi-open countries with mixed economies outperformed the US. Shouldn’t the US follow suit? Indeed, today, the semi-open, mixed Indian economy has (so far) escaped the worst ravages of this recession. So my concern is not with anyone questioning the worth of a foreign investment. I just want such questioning should to be based on objective criteria, not irrationality. Today, all of us should take on to ourselves the responsibility of injecting such objectivity into discussions we participate in.

The biggest challenge to our doing so is that we just don’t know enough about how the rest of the world thinks. Fareed Zakaria’s book, The Post-American World, (which I mentioned in my first post) can help. Mr. Zakaria brilliantly describes why America no longer dominates a unipolar world. While it still leads on virtually every important metric economic, technical and social metric, the rest of the world has risen. So, today world has other poles anchored on China, EU, India, Japan, Korea, Brazil and Russia. Americans should embrace and celebrate this, because it creates tremendous opportunities and indeed makes the world safer. This argument is well supported by multi-faceted – economic, political, social, technological and cultural – data and anecdote and is therefore very compelling. Unfortunately, Mr. Zakaria does not go far enough. He needed several more chapters addressing how each of the new “poles” see the important issues of the world. Where can the various poles agree? Where do they differ sharply? What principles, if adopted, could help the poles collectively resolve our huge challenges?

So, if you are a Chinese politician, bureaucrat or business person, what do you think of Secretary Clinton’s challenge? Why? This inquiring mind wants to know.

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Marie Antoinette’s Soul Mate

January 20th, 2009 — 6:41pm

I’m back! I hadn’t meant to be away for five weeks, but life intervened. In my defense, I didn’t notice anyone actually breaking my door down asking about my whereabouts …

I am wondering if you heard the recent Robert Siegel interview of GM Vice Chairman Bob Lutz on NPR’s All Things Considered a few days ago. If not, it is definitely worth listening to (http://www.npr.org/templates/story/story.php?storyId=99253055), for it gives a unique insight into the travails of the US auto industry.

Mr. Lutz showed great restraint; he waxed eloquent about the stupidity of the average consumer, without actually using the word. GM produces great cars, he said, but only a handful of experts really know this. It will take time for the experts’ opinion to filter down to the great unwashed masses and GM had no choice but to wait this out. Asked about the effect of the government bailout on the workings of his company, he said, “I’ve never quite been in this situation before of getting a massive pay cut, no bonus, no longer allowed to stay in decent hotels, no corporate airplane. I have to stand in line at the Northwest counter. I’ve never quite experienced this before. I’ll let you know a year from now what it’s like.”

If anyone has any doubts about why GM is really flirting with bankruptcy, Mr. Lutz comments should have clarified the issue. The Vice Chairman of a company which went with a begging bowl to Congress acted as if he was Marie “Let them eat cake” Antoinette’s soul mate. CEO Rick Wagoner and GM’s Board should have repudiated his statements by publicly firing him, but in my heart of hearts, I knew that my life would long be over before any good sense emanated from those quarters. But hope is what keeps the world spinning, does it not?

So, did Mr. Lutz change my mind about the auto industry bailout? No! If anything, his words are proof that the bailout is needed to preserve the company until more drastic steps can be taken.

An argument – also made by a handful of others – is that without the bailout, the industry’s second and third tier companies will be irreparably weakened. This will harm the broader industry’s stronger companies, for they rely on many of these companies too. Ideologues don’t understand this is the unfortunate logic of networks: As I’ve written elsewhere, it is hard to succeed if your network is failing.

The more important, and thus far unmade, argument is: bankruptcies will not reform these companies. In the best case scenario, they would file for pre-packaged bankruptcies (in which creditors back the financial restructuring plan) without scaring customers (even though buying a consumer durable is a riskier bet than buying a ticket from a bankrupt airline). Who will manage GM through this process? People like Mr. Lutz will represent the companies. Across the table from them will be their creditors. What will the negotiations focus on? The executives will argue they can fix the problems – if everyone else makes large concessions. The creditors – rightfully – will be trying to get back their money as quickly as they can. No one will be focusing on changing the culture that allow people like Mr. Lutz to be top dogs. And without changing culture – encouraging collaboration, being open to others’ ideas, being willing to take considered risk, managing learning every day, etc. – these companies will stumble from one disaster to another. Changing culture takes great effort, committed leadership and time. All three will be in short supply during the negotiations and during the tightly choreographed marches towards tough milestones that will follow.

I hope the Obama administration’s Auto Czar, backed by the bills that Congress must pass (to provide additional funding) by March, will be able to force change. As I wrote in an earlier post, I would like to see appointees to the Boards, an orderly departure of people like Rick Wagoner and Bob Lutz, and a shifting of power to less jaded executives running smaller companies created by splitting up the behemoths. The ideologues will probably not let this happen, but extraordinary times call for extraordinary steps. Nevertheless, I’ll even take smaller steps along the lines I have proposed while hoping for more. Hope, as I said, is what keeps the world spinning, does it not?

Comment » | Business Environment, Company Performance, Corporate Culture, Financial crisis, Leadership, Organizational structure, Politics

“There’ll Be Spring Every Year Without You”

December 5th, 2008 — 5:01pm

At this week’s Senate auto industry hearing, Senator Christopher Dodd noted that a death sentence focuses the mind. It does, but for the US auto industry, it took a humiliating public whipping of its CEOs for this to happen. In my last post, I took Rick Wagoner to task; in The Spider’s Strategy, in a chapter I mostly wrote two years ago, I expressed extreme pessimism about the industry and called Chrysler “the canary in the coalmine.” I can only shake my head in disbelief at Boards of Directors which trust executives who lack basic common sense: You don’t go begging for alms wearing Armani suits and flying corporate jets!

I have had the good fortune to work with several C-level executives, including CEOs and Board members. The common trait across the very best of them: they are astute politicians, who understand how to build coalitions, not just of the like-minded, but of those whose interests are not aligned with theirs. Detroit’s top executives, in contrast, did not see this in political terms. That they publicly displayed such naïveté speaks volumes about their companies’ culture: Imperialistic, with CEOs as monarchs who believe that the world would be truly worse off if they were not around. No wonder they are isolated from the real world!

In contrast, a very successful Chairman of the Board of a global company I’ve worked with had an office with glass walls which was about half the size of typical bedroom. It was located next to the operating area of a key business unit. It is not unusual for the CEO to walk into the company’s break room to pick up his own coffee. He had lunch with small groups of new hires. When I reported that a long-time employee had asked when old timers would be similarly invited, he immediately asked his secretary rectify his error; he invited his critic and a few other long-timers whom the critic thought he should know. If this CEO ever had to go to Capitol Hill and ask for help (I doubt he’d ever have to), he would not make the errors the Detroit CEOs did. Oh, by the way, this gentleman is probably as rich as, if not more than, them.

In Lerner & Leow’s My Fair Lady, Eliza Dolittle sings to Professor Henry Higgins, “There’ll be spring every year without you/England still will be here without you/ …/And without much ado/We can all muddle through/Without you.” Perhaps Mr. Wagoner, Mr. Nardelli and Mr. Mulally should play this snippet of the movie a couple of times a day on computer/video screens in their offices. It might induce them to leave the rarefied atmosphere of their sanctums and visit the real world more often. Who knows, that might cause them to rebuild their companies with policies more suited for a networked world and so create cars people want to buy. Ironically, of course, there may not be much of a spring for the American economy if these companies are not saved, despite their incompetence.

In the next post – which I promise will be soon – I’ll comment on the substance of the plans and the hearings.

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“What’s Good for General Motors is Good for America”

November 13th, 2008 — 1:49pm

The Federal government’s denial of the $10 billion bailout for the now aborted GM-Chrysler merger took my thoughts back to the Darden School of Business, 1981-1983. There, I first heard the saying, “What’s good for General Motors is good for America,” justified by the fact that 10% of Americans worked in the auto industry (and still do). Somehow, I was not convinced.

On the one hand, several of my classmates were GM managers on leave with full scholarships. They did not have to return to GM, but not one was even interviewing elsewhere. Surely a company that inspired such loyalty was well managed? On the other hand, a case we discussed documented years of mismanagement of GM’s Tarrytown New York plant; we had to decide whether to try to fix it or shut it down (and open a brand new plant). Moreover, Toyota had just begun thrashing the industry. A top GM executive spoke at a doctoral seminar I was auditing. He said GM had considered, and then abandoned, the idea of making small cars because it couldn’t be done profitably. That decision – and similar ones at Ford, Chrysler and AMC – made Toyota’s task a cakewalk. (The executive’s talk led me to undertake the independent research study on financial risks analysis I mentioned in a prior post on the global economic crisis.)

The more things change, the more they remain the same. In 2001, The New York Times published an article on production outsourcing at GM. The existing GM plant was rundown, filthy, and struggling; the proposed outsourcing vendor operated a computerized, almost “cleanroom conditions” plant. In more recent years, we’ve heard caterwauling from GM – and the broader industry – about the inability to anticipate the need for hybrid technology.

Should such executives be trusted with a share of the $25 billion in modernization funds they are still seeking? Over a close to 30 year period, two generations of GM executives have failed to strategically manage their company. I’ve briefly cited two virtually identical stories of factories run into the ground and lack of investment in next generation products. I don’t know about you, but I don’t get the warm and fuzzies they know much about modernization. Two epochal changes (see the very first post in this blog for a definition) and these people blow them both.

GM’s problems are not its labor or its infrastructure; they are endemic in the culture of management practiced there. It was apparent in the sheer audacity – chutzpah is a better word – of CEO Rick Wagoner comparing the denial of the $10 billion to the Treasury’s not bailing out Lehman Brothers. Did he ever consider saying, “I’m sorry America, my entire management team and most definitely I, blew it. We will tender our resignations in an orderly manner so as not to do more harm. In the meantime, please do not take out your anger at us by punishing the people and communities GM operates in.” Perhaps it is the water in Detroit … I’ll remember not to drink any next time I visit that city.

Nevertheless, I would hold my nose and give GM the money. In this networked world, the failure of this large a company will bankrupt many suppliers and dealers and most importantly – as I had mentioned in a prior post – will tank the still-struggling financial markets. However, recognizing that this company cannot be trusted to reform itself, I would insist on the following conditions:

One, the Feds get to appoint a couple of Board members who must be on GM’s Finance committee. (Some people may rage about this taking us closer to “socialism,” but surely that is preferable to the brand of capitalism practiced by Mr. Wagoner?) Two, Mr. Wagoner and his top lieutenants must resign in an orderly fashion, without their golden parachutes (If a company can seek to break binding legal contracts with its suppliers through a bankruptcy court, there must be at least 10,000 lawyers who can figure out ways of getting GM to rescind its contracts with it its executives). Three, the Fed appointees should have veto rights on the replacements for Wagoner and his associates. Four, over the next five years GM (and Ford and Chrysler) must be reduced in size, so they are no longer “too big to fail.” This will require mandatory spin-offs of relatively independent businesses (as some analysts have suggested). Five, no one in the top spots in any of the restructured companies should come from the senior-most ranks of these companies; fresh blood that is willing to be boldly rethink how to operate in a networked world, is essential.

What may be really good for GM is definitely no longer good for America. And what is good for America will most definitely not be good for GM’s management. National policy makers must make incompetent executives pay without destroying the economy. If they pull-off this balancing act, the people will cheer them on to re-election. If not, we will have to bail out many others in the years ahead.

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