NEWS ANALYSIS : GM Shuffle May Be Watershed in Reining In CEOs : Leadership: The auto maker’s case is being watched closely as directors and shareholders take steps to make executives of ailing companies more accountable.
The chief executive, who once lived in splendid isolation at the top of his corporate empire, is under siege.
Last week’s directors’ putsch at General Motors and a host of shareholder proposals at many of this month’s corporate annual meetings suggest that chief executives of sickly companies are confronting a growing challenge to their power from directors and institutional investors.
Frustrated by the slow pace of change in an era when international competition, deregulation and swift technological change demand speed and flexibility, directors and shareholders are stepping up demands for accountability from top officers whose power and privileges previously insulated them from scrutiny. Consider these examples:
* At Sears, Roebuck & Co., shareholders are being asked to vote on a proposal to split the office of the board chairman and chief executive, mandating that the chairman be elected from among outside, independent directors.
* At Reebok International, a shareholder proposal calls for an independent compensation committee to curb the lavish pay of top officers, especially Chairman Paul Fireman.
* At General Dynamics, a proposal in proxy materials seeks a change in the board’s composition from the current majority of insiders to a majority of outsiders.
* At GM, outside directors finally faced up to the fact that after years of failing to counter devastating international competition, GM has failed to implement a strategy capable of stemming horrendous losses in U.S. auto sales.
In a management shuffle that also demoted President Lloyd Reuss, directors named 64-year-old John G. Smale, former chairman of Procter & Gamble, to head a top board committee that will closely monitor Chairman Robert C. Stempel’s future agenda and timetable for change.
Though Smale issued a press release downplaying his role and expressing confidence in Stempel, analysts from academe, as well as institutional investors, discounted it. Said Donald Frey, former head of Ford Motor Co.’s product development efforts and now a professor of engineering at Northwestern University: “It’s clear to me the outside directors are now in charge of the company. The agenda for downsizing is coming down on management like a ton. I say, ‘Hurrah, it’s about time.’ ”
Experts in corporate governance cite the GM case as a turning point, an event that will be seen in the future as marking a sharp break with the days of cozy cronyism, when board members and top executives formed a club of good ol’ boys. They welcome the directors’ intervention as an encouraging sign.
Said Harry DeAngelo, a professor at USC’s business school, “The GM situation is a landmark because it is so visible, a company that has been protected by sheer size for a long time. To have the board stand up and say, ‘We need a different approach,’ is healthy.”
Observers believe that directors are reacting today in part to pressure from big institutional investors, particularly public pension funds. Institutional shareholders have increased their holdings in the stock of U.S. companies to nearly 50% of all shares outstanding from 29% in 1980.
Their holdings are so enormous that when companies stumble, institutions can’t find a market big enough to absorb their shares.
At the $68-billion California Public Employees Retirement System, explained Chief Investment Officer DeWitt Bowman, “We realized we don’t have the option of voting with our feet. The only course available is to see (that) companies are effectively run.”
Added Elizabeth Holtzman, New York City controller and investment adviser to the New York City Employees Retirement System, “We are long-term investors. We can’t get out of these companies. We want to break up the concentration of power at the top, create more accountability, provide checks and balances.” The New York City retirement system is sponsoring the initiatives at Sears, Reebok and General Dynamics.
CalPERS, which owns 4.3 million shares of GM stock, has met with company directors over the years, stressing the need for them to act independently and to represent the interests of shareholder-owners.
Bowman said the tactic is beginning to work. “We are seeing greater accountability to shareholders, especially in these large bureaucratic organizations. More critical and objective measures are being used to evaluate top management.”
That the GM directors’ action took place at a company once synonymous with the nation’s economic health made the impact of the move more profound.
“Every board member in America is following this story and thinking about what it means, thinking about their own companies,” observed John Kotter, a Harvard Business School professor. “That’s good, because for some reason boards (historically) have been part of the problem, not part of the solution.”
Certainly chief executives of companies with chronic losses and grumpy shareholders are feeling aftershocks from the GM earthquake. In the halcyon days when U.S. companies dominated world business, board members were selected by and beholden to chief executives.
Said one former board member, “They just showed up at meetings for their checks and the Dover sole.” Today CEOs must wonder who on the board is friend or foe.
Michael Useem, a professor at the Wharton School of the University of Pennsylvania, warned that examinations of outside directors’ success in overseeing top management suggest that not all interventions are successful. “The studies are equivocal,” he said.
Joseph Grundfest, law professor at Stanford University and former member of the Securities and Exchange Commission, said: “To monitor chief executives, we need knowledgeable, independent outsiders with backbone who are able to look the CEO square in the eye and say, ‘You are not living up to expectations. Shape up or ship out.’ ”
Meanwhile, at companies where massive cost cutting and attempts at reorganization have yet to pay off, such as IBM and Citicorp, there is new uncertainty. Harvard’s Kotter summed up: “It’s tricky to tell what the GM situation means and how many more fireworks we are going to see. It’s clear some board members are feeling stung, feeling they are captives of the CEO. This is not the last move.”
