Large business and industrial corporations distinguish the period from the end of the 19th century extending to contemporary times, from earlier periods of history. Never has business had such a pre-eminent and influential role in society. Money-lending, which was once the sole preserve of people who took to such a vocation, is now a legitimate way of supplementing income for people from all streams of life: there were no stock exchanges before the first quarter of the 20th century.
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Current geo-politics is also different from any other period in history because never has a single country exerted such power and influence over the entire globe: it follows that U.S. corporations are watched with special care, both by the advocates of free enterprise, and by former opponents as well. Every action by a large, ostensibly professionally managed company of American origin has significant potential impact, both domestically and all over the world: most of these entities have operations in most countries anyway.
It is in this context that this document is set, covering the business situation of General Motors (GM), with special reference to Corporate Governance. The company has conducted business for over 100 years, delivers more than 9 million automobiles per annum, employees over 250 thousand people, and has yearly revenues of over $200 billion (Form 10 K, General Motors Corporation, 2007).
This document takes stock of the current business situation of GM, reviews concepts of Corporate Governance, and applies them to the case of this company. The document contains suggestions for the future of GM, with the particular aim of giving expression to the aspirations of minority share holders.
The GM Business Situation
The company has made a loss of over $2 billion in the last accounting period for which detailed accounts are in the public domain (Form 10 K, General Motors Corporation, 2007). The management has put together a plan to return to profitability in the future, which requires very significant changes in operations, structures, and systems. The management admits that this turn-around plan faces difficult hurdles and major risks. Prospects for all categories of stake holders are poor, compared to other opportunities available in the market place.
The company has invaluable resources, assets with high future potential, and it is in a line of business for which sustained demand is assured. People will always want new models of automobiles, and only companies such as GM have the capabilities to meet future energy, emission, safety, and design norms. Already, demand from emerging countries, even for lower range revenue lines such as Chevrolet, is encouraging (Form 10 K, General Motors Corporation, 2007); similar surges can be expected from other countries, such as the ones in Africa, in due course.
Stakeholders are faced with a quandary with respect to GM: a continuation of past management ineffectiveness could add to their opportunity and even capital losses, while exiting share ownership and other forms of association with the behemoth at this juncture, could mean lost opportunities in the foreseeable future. Which way will the crew that runs GM take the company?
They certainly look after their own stakes very well! The company’s pension plans are more generous than even the requirements of revised legislation (Form 10 K, General Motors Corporation, 2007). Health care costs have spiraled out of control, and for a company which makes losses, represents a kind of welfare state!
Shop floor employees have jumped on to the bandwagon; unions make outlandish demands and are recalcitrant about even the most reasonable of suggestions to achieve the kinds of productivity which foreign competitors routinely enjoy.
GM has followed haphazard horizontal and vertical integration practices with disastrous results, akin to the handiwork of its Human Resources Management function. Delphi, a major supplier of ancillaries, has applied for bankruptcy (Form 10 K, General Motors Corporation, 2007). Incredibly, GM has accepted liabilities related to payment of wages to Delphi employees! There is a similar situation with respect to GMAC Financial Services, in which GM has held 40% equity until recently.
The company is subject to significant risks of litigation (Form 10 K, General Motors Corporation, 2007); many class action suits in progress. The costs of defending the company, and the potential costs of meeting possible awards against the company, are staggering, leading to questions about the provisions which have been made.
The doubts about the adequacy of provisions in the statutory books of account, as mentioned above, stem from the fact that authoritative financial agencies have drastically downgraded the company’s credit ratings (Form 10 K, General Motors Corporation, 2007). Further, regulators have started inquiries and proceedings against the company related to its questionable and now infamous accounting practices. The management has admitted that its internal controls in these respects have been poor (Form 10 K, General Motors Corporation, 2007).
There are serious lacunae in other functional areas as well. The prices, at which products at the higher reaches of the price curve are sold, are not maintainable (Form 10 K, General Motors Corporation, 2007). The company is unsure of regaining ground in some of the most profitable segments in which it has done business in the past. Further, pay offs from investments in new technology are uncertain (Form 10 K, General Motors Corporation, 2007) in the official opinion of the management.
Overall, the company is still to recover from poor strategies and principles followed by past management teams, and the modest steps it has announced towards recovery, seem to be insufficient to return the financial statements to their peak states of health of the past.
It is apparent that honest and well-meaning executives will not suffice to help GM realize its full potential again. There is a need for a skilled and highly capable Board of Directors, not for show piece reasons, but to exert effective stewardship of the legitimate interests of all categories of stake holders. Corporate Governance of the highest quality is a clear prescription for GM.
Relevant Concepts of Corporate Governance
Corporate Governance is new in the lexicon of Business Management. It can mean anything from a symbolic attendance at perfunctory committee meetings by senior citizens and nominees of majority stake holders, to a total subversion of executive authority, effectively taking over the reigns of management altogether. Where in this spectrum, can GM find a fit?
A major change in business ethics during the past 2 decades has been the introduction of controls on all forms of abuse of employee rights (Cory, 2001). Discrimination, harassment, and insecurity have been some of the unpleasant ghosts of the past, which do not concern us as much in the current times.
Quality is a second axis along which business ethics have improved considerably of late (Cory, 2001). This may not be due to Corporate Governance per se, as much as because of competitive pressures and consumer awareness. Companies such as GM, at any rate, are not able to pass on sub-standard products and services: this can be a concern of Corporate Governance in some third world cases, but it does not apply to this case.
The environment is another area which has occupied some Corporate Governance resources of late (Cory, 2001) but again, the automobile industry as a whole has a fair record in terms of improving safety, emission, and related norms. Though GM is not able to find buyers in sufficient numbers to buy its automobiles (Form 10 K, General Motors Corporation, 2007) there can be no denying that the executive structure has produced safer, better looking, feature-rich, efficient, and less polluting models than populated roads a decade ago. Therefore, the environment is not such a prime focus of Corporate Governance at GM as it might be in a chemical company.
Rights of minority shareholders is the most pressing Corporate Governance concern at GM. This aspect has been ignored in most Corporate Governance circles (Cory, 2001). We have seen that GM employees take great care of their own pay-checks and privileges. Suppliers, and new enterprises set up with GM shareholder funds, all have a ball as well! Large financial bodies have warned their cronies by downgrading the company’s credit rating. Who will cry for the small shareholder?
The rights of minority shareholders have not received the same attention everywhere: countries such as France and Israel have ignored this aspect, whereas it receives high attention from all stake holders in the United States. Corporations which operate globally need uniform standards (Cory, 2001). This is an issue at GM as it expands business in emerging countries. Some countries do not prohibit insider trading. Majority shareholders use inside information to buy and sell shares and make large sums of money, whereas minorities who do not move quickly in tandem, are the losers (Cory, 2001)
Lawyers paid by majority interests in corporations, and the media dependant of advertising and sponsorship from the same type of vested interests, effectively prevent any form of real legal recourse for minority shareholders (Cory, 2001). Boards of Directors may also fail in governance matters because they are appointed by majority interests.
The nexus between executives and majority shareholders who appoint and pay them is at the heart of the problems of minority shareholders (Cory, 2001); executives may also receive company shares at such advantageous terms that they lose their objectivity and impartiality in the process. However, we do not know if this has occurred at GM.
Specific Corporate Governance Problems at GM
Governance issues have dogged GM almost since its formative years at the start of the 20th century (Minow, and Monks, 2004). It has pulled through on support from DuPont in the past, and because of the war effort, but has historically suffered at the hands of mercurial executive leadership, often confused with majority ownership. It has a tradition of resisting financial control even from those who have resourced it.
Leadership issues have always dogged GM (Minow, and Monks, 2004). CEOs who have succeeded the founder over the past decades, have wielded unchecked powers, taking suicidal decisions which have crippled the company. This has had a domino effect on lower echelons of management, with everyone in the company selectively guarding their patches of turf.
Boards of Directors have failed miserably in their professional responsibilities, lending their votes in almost slavish manner, and behaving more like party functionaries in politics, than as independent professionals with moral duties.
Companies are the last vestiges of dictatorial regimes. Hence, change has to be driven by CEOs (Cory, 2001). GM is fortunate because there are now clear top management statements in public, on the need to restore public confidence through diligence in daily operations (Corporate Governance Documents, 2007). This may be because of the effects of the Sarbanes-Oxley legislation (Minow, and Monks, 2004). However, it is reassuring that GM now makes a sincere effort to restore order. Comprehensive Corporate Governance guidelines are now available (Corporate Governance Documents, 2007). Management committees with transparent functioning and true independence can improve matters (Cory, 2001)
There are additional measures which the GM Board may wish to consider in order that the return to honest, transparent, and professional functioning, occurs sooner. It can implement the European Union guidelines, where it has substantial business, for independent audit and reporting on governance issues (Crowther, 2004). This will make its operations more transparent, and the executives more accountable. The company may also extend the system to environmental issues, for which the European Union guidelines were first issued.
Directors should be empowered further, with remuneration to attract the best in the business. Each Director should be fully committed to the purpose of GM, and should be fully accountable for the roles they play in real life.
The present CEO is also Chairperson of the Board of Directors (Corporate Governance Documents, 2007). It would be better if these 2 positions were to be separated as an additional safeguard against the torts of the past. This step will also help to restore confidence in the legitimacy of the corporation (Crowther, 2004).
Governance is related to business ethics; the latter in turn is affected by trends in society and in geo-politics as well. Corporate USA is swept along with waves of pressure for transparency and accountability on all fronts (Cory, 2001). The kinds of decisions which have been taken by GM in the past 20 years may still be acceptable or at least ignored in other countries, but entities listed on the New York Stock Exchange no longer have this kind of laxity. The practices of companies such as GM have global impacts, because such management and directorial teams are treated as models by smaller and domestic enterprises all over the globe. Though country cultures play roles, corporate governance is moving towards uniformity (Minow, and Monks, 2004); there are also pressures from global investors for better standards and more transparency. Small shareholders of companies such as GM will soon be from other countries as well, and it is additionally ill-advised to abuse their interests.
The protection of minority shareholders is not on account of altruism. It is because they will withdraw from the stock market if their interests are abused by the majority, causing another Great Depression (Cory, 2001). Retail activities at stock exchanges have more influence on macro-economics than is generally recognized. No one can gain, at least in domestic terms, if there is an irreversible failure at GM. Effective Corporate Governance is in the broad national interest, apart from questions of ethics.
Cory J, 2001, Business Ethics: The Ethical Revolution of Minority Shareholders, Springer
Crowther, D, 2004, Perspectives on Corporate Social Responsibility, Ashgate Publishing Limited
Minow, N, and Monks, R, 2004, Corporate Governance, Blackwell Publishing
Corporate Governance Documents, 2007, General Motors company web site, accessed May 2007 from: http://www.gm.com/company/investor_information/corp_gov/
Form 10 K, General Motors Corporation, 2007, New York Stock Exchange web site, accessed May 2007 from: http://secfilings.nyse.com/files.php?symbol=GM&page=2&extras=0
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