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
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.
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
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."
That same year, former GM board member Ross Perot complained: "At GM the
stress is not on getting results—on winning—but on bureaucracy, on
conforming to the GM System. You get to the top of General Motors not by
doing something but by not making a mistake."
A top GM decision-maker for 17 years
Given GM's cultural hindrances, Rick Wagoner's weak predecessors, and
the perilous economic times, does this mean Wagoner, an honest, likeable
fellow, is exempt from blame? Not if we think of CEOs as possessing
transcendent leadership qualities. He led as CEO from 2000 to 2009 and
as President or CFO since 1992—17 years at the controls as GM careened
toward the cliff, failing to brake.
This is not the first time GM has faced tough times. Soon after William
Durant, a former carriage engineer, founded GM in 1904, he drove the
company into several potholes—even then needing large bailouts by its
bankers. Hitting economic distress a decade later, Durant lost control
of the business to Pierre Du Pont—who in turn instituted needed
financial discipline and accountability. In 1923, Du Pont turned over
the keys to the ingenious Alfred Sloan, who introduced style and design
to auto manufacturing as well as a sound management structure.
Rick Wagoner proved to be no Pierre Du Pont or Alfred Sloan. In fact,
the affable Wagoner can be judged more harshly than the vilified Roger
Smith since Wagoner had Smith's public lessons to draw from. But rather
than learn from them, Wagoner repeated them. For example, Wagoner's
immediate predecessor, the short-term transitional figure Jack Smith,
served as CEO while former Procter & Gamble (PG) CEO John Smale served
as chairman. This revolutionary separating of the CEO and chairman roles
(and the consequent addition of truly independent directors) allowed the
board to pursue an agenda wrested from management's control.
Yet these reforms, inspired by attorney Ira Millstein, were rolled back
under Wagoner. He recombined the chairman and CEO roles, assuming
greater board control. He then packed the board with sympathetic voices,
including four fallen CEOs from other companies, and ceremonial,
nonbusiness figures. With the exception of two or three truly
independent voices (especially the courageous surviving directors Kent
Kressa and Neville Isdelle), the emotionally conflicted larger board
circled the wagons to protect the CEO when legitimate criticisms arose,
much as Roger Smith's board did.
This board rubber-stamping allowed Wagoner, a product of GM's dangerous
cultural mindset, to drive the company back into past calamitous
potholes. Consider this sampling of missteps on Wagoner's part:
• He lost $82 billion in just the past four years, and cash management
was so poor that five years ago, GM's debt was properly downgraded to
• He made astoundingly bad product decisions, such as supporting the
poor-selling Pontiac Aztek and cancelling GM's early move into hybrids.
And Chevrolet could have been marketing the Volt a decade earlier than
it did, thanks to the prescience of Robert Stemple, a Wagoner
predecessor who as CEO from 1990 through 1992 greenlighted the
development of the EV 1, the first electric car.
• In 2002 he ignored urgent trends to focus on car development while
reaping 90% of profits from pick-ups and SUVs.
• He maintained too many divisions and too many lookalike products.
• He was under-responsive as the economic crisis revealed itself,
cutting production only 25%, while Ford cut more than 45% in the first
two quarters of this year.
• He squandered great names like Saab, Opel, Saturn, and Hummer by not
properly investing in them and hoping instead to harvest past
initiatives and covertly transplant core GM car platforms.
• He led a misguided joint venture with Fiat that cost GM $2 billion to
extricate itself from. He allowed GMAC, when he controlled it, to bathe
in the subprime lending market with its disasterous RESCAP subsidiary.
Contrast that with the strategy of Ford (F), which got out of that
high-risk lending in 2002.
• He sold GM's valuable GMAC internal financing arm to Cerberus, which
also controlled GM competitor Chrysler. In December and January,
Cerebrus basically stopped writing retail finance contracts to support
• He pursued plans to purchase Chrysler, drawing on an anachronistic
mindset that saw virtue in bulk operational size and scale efficiencies
rather than profits, quality, and reputation.
• Wagoner continually went before the American public and Congress
unprepared and angry, demanding taxpayer support without ever being able
to articulate why he wanted $25 billion, how the company would use the
money, and what GM's vision was for a future viable enterprise.
Rick Wagoner had the potential, the intelligence, the experience, and
the education to be an Alfred Sloan, a Pierre Du Pont, a Carlos Ghosn, a
Lee Iacocca, or even an Alan Mulally, but instead he chose the path of
William Durant and Roger Smith. That his poor performance was rewarded
with a 64% jump in total compensation, from $9.57 million in 2006 to
$15.7 million in 2007, is a disturbing testimony to how far GM's
once-revolutionary board reforms had retreated. Many shareholders have
lost their investments, many workers have lost their jobs, and this
nation has lost needed industrial might.
The free hand Wagoner had to make so many poor choices is an indictment
of GM's board. But the choices he made speak to Wagoner's bad judgment
when his company most needed him. "Engine" Charlie Wilson—a GM CEO in
the 1950s—may have been on the right track when he said: "What is good
for General Motors is good for the U.S." Rick Wagoner was not good for
GM—and he was not good for the U.S.