GM's Board Says No to Magna et al.

GM’s board’s U-turn on strategy was a jolt to many, not the least the apparently unhappy German government that thought they had a different deal in place. After further consideration, the board flexed its muscles and said no, a gutsy and controversial move to be sure. What does this episode tell us about boards and strategy?

Perhaps the most important lesson is this: boards have a fiduciary responsibility (in America) to do what they deem necessary to protect and grow shareholder value. Signs of economic recovery, the waning of panic in the boardroom and executive suite that dominated thinking in GM’s darkest hours, and a deeper analysis of what strategy this company needs to execute a turnaround all played a role.

While the circumstances were different, one can contrast GM’s decision to renege on a deal with Bank of America’s experience with Merrill Lynch. The B of A board also felt tremendous pressure to move forward on a deal – the acquisition of Merrill Lynch – that was damaging to shareholders, yet they didn’t muster the courage to take on the US Treasury. So what’s the right thing to do?

Boards and management teams absolutely have the right to change their minds – how could they not? However, under “normal” business conditions, such dramatic policy shifts might signal turmoil among executive decision-makers and a house that can’t figure out what to do. The price such a board or management team will pay may be high. Just a few years ago then-CEO of Tyco, Dennis Kozlowski, announced a breakup of the company only to quickly revoke the move, triggering a pivotal downward shift in the market’s perception of his credibility.

What’s different here is that GM’s board is newly empowered, has the implicit support of the US government, and as a result has adopted an almost “devil may care” attitude. Save GM, and nothing else matters. Of course, there will be a price to pay down the line for this cavalier approach to important stakeholders, but that is the long-term and right now GM is focused on survival and not worrying too much about collateral damage. And they’re right.

Ken Lewis and CEO Succession at Bank of America

Ken Lewis leaves Bank of America with one last present – a CEO succession mess. But like Ken Lewis himself, it won’t last for long.

In notifying the board of his “plan” to retire by year-end, Lewis ensures a succession process that will not be smooth. Each of the top candidates – Moynihan, Montag, and Krawcheck – is now thrust into a quick sprint to the CEO job. This horse race ensures that the person who doesn’t get the big job will be seen as a “loser,” meaning they will certainly leave the bank.

More well-thought-out horse races give the leading candidates plenty of time to prove they have the right stuff, to interact with the board on numerous occasions, and to reinforce their positions at the top. Three months just doesn’t allow any of this to happen at a measured pace, creating a free-for-all in the corner offices. Complicating matters is a board made up talented people who just started their own jobs as directors, and cannot possibly have the insight they need to select among these leading candidates in this short time window.

What to do? First, there is little reason to keep Lewis in the CEO slot for three more months. He is as lame a duck as there ever has been, and the three months he might stay on hardly makes for a textbook transition.

Second, the board of directors needs to quickly take charge of the succession process. It’s time for experienced board members like William Boardman (Banc One; Visa International) and Robert Scully (Morgan Stanley), among others, to show the world that the new Bank of America board is active, attuned to the marketplace, and talented enough to work this out.

Third, and this is less certain, but I can imagine the board deciding to elect one of their own as the Interim CEO, with a clearly defined tenure that will be more than 3 months but less that 15 months. During this transition stage, the board can do what effective boards always do when it comes to CEO succession – spend time with the top candidates, gauge their capabilities and weaknesses, and come to a determination on the best person to be the next CEO of Bank of America. This is not a job that can, or should, be rushed into the timetable that Ken Lewis has thrust onto the board. At the same time that this evaluation of internal candidates is going on, the board should look outside as well to make sure that full due diligence is done. The board may well decide that there is more than enough talent among the leading inside contenders, but to not look outside, at least at first, is to unnecessarily cut down on viable options.

All considered, Bank of America may yet be better off with Ken Lewis leaving, than staying on for an orderly transition. He’s had his nine lives already, and it looks like Judge Jed (Rakoff)’s decision to question a settlement (on Merrill Lynch bonuses) that punishes the innocent (shareholders) while protecting the guilty (executives, and perhaps the board) is finally the straw that broke the camel’s back.

Note: A version of this post can be found today in the WSJ Online

Lessons on Leadership: Obama’s Health Care Strategy

The New York Times magazine had a terrific article by Matt Bai yesterday on how President Obama and his team are building momentum toward a new health care plan that he sees as the #1 priority for the Administration. Reading the piece I couldn’t help but be struck at the tactical steps being taken that are nothing short of brilliant. These same tactics are essential ingredients to effective implementation of complex strategies, in politics, in business, and in everyday life. Here’s a quick summary:

1. Understand, and Co-opt, Dominant Power Structures.

Organizations are not boxes on a chart. They are made of people who have power, like power, and use power. Outsiders, change agents, even CEOs, will almost certainly fail if they don’t appreciate this reality. From President Bush’s social security plan to President Clinton’s own health care tsunami, a strategy of imposing a solution on upper-level managers, or members of Congress, does not work.

2. Relationships Win.

President Obama and Chief of Staff Rahm Emmanuel have brought on board the Administration team a wide selection of talent with tremendous personal and professional connections to key members of Congress. Former chiefs of staff and long-time aides to key legislators come with long relationships, trust, and inside information on how things really work, skill-sets that are replaceable.

3. Symbolic Gestures Help.

President Obama would just “happen” to drop by when a Senator was meeting with one of his staff. Invites to the White House theatre, dinners, and other social occasions for members of Congress is standard practice (as is a careful accounting of who goes and how often).

4. Involving Key Players Builds Buy-In.

Rather than show up with a fait accompli, President Obama’s strategy is to lay out the vision for health care reform, and work directly with Congress in defining the specific parameters of what the reform will look like. By involving Congress in the details, they gain ownership, and are more likely to move forward with actual implementation.

5. Sell the Strategy.

One of the toughest lessons of management is that the best ideas don’t win. The “right” answer does not win. What wins is what can be passed, and implemented. Getting there means the CEO must sell the strategy to key constituencies. This is often one of the hardest lessons for MBA students to get. They are used to being right (that’s how you get into b-school to start with), but being right is not enough. You have to convince others that you are right. As Matt Bai of the New York Times points out, expect Obama to be very active in not only selling whatever health care reform plan emerges, but the very idea that some type of universal health care plan is a good thing.

The Power of Perceptions

Spring is in the air, even in the northern reaches of New England where I call home. Summer is almost here. The stock market is up, a lot. GM has been “fixed,” Fiat is buying Chrysler, buyers are lining up to bid on foreclosed homes in Phoenix, and even newspapers are less dead than they were a few months ago. It seems rather easy, doesn’t it?

Call it the power of perceptions. Sentiment has turned from utter disaster to great hope, and I like it. My tennis game is getting better, my weight is terrific, my cooking better than ever, and I like it. If we feel something is, then it is. The power of perceptions. If reality intrudes on this pretty picture, and it turns out that GM is not fixed, that nobody is reading newspapers, and that my tennis game isn’t all the good after all, we’re in deep trouble. So I prefer to believe that all is good with the world, we are getting better, and summer is just around the corner. Right?

Feds Teach Corporate Governance to Bank of America

So, the Feds are pressuring Bank of America to reconfigure their board so someone actually knows what they are doing. OK, they didn't say that exactly, but the point remains. The BofA board is lacking in financial talent. While there is room for improvement, I think the key is for the board - regardless of who sits in the seats - to actually do their jobs. They've sat by for far too long, especially in their continuous support for CEO Ken Lewis after each major multi-billion dollar gaffe. If it takes the Feds to bring better corporate governance to Bank of America, so be it. We can't be happy with this unprecedented involvement of the federal government in how companies are run, but what does it say about corporate governance in America if boards won't fix themselves?

One final point - if the board can't move off of Ken Lewis, perhaps the Feds can help there too...

Will Fiat be the New GM?

Let’s hope Fiat CEO Sergio Marchionne is a student of history. His apparent strategy of combining Fiat and Chrysler with whatever GM assets he can find around the world, including Germany and South America, will create a global behemoth. With such diverse operations and assets, it seems like a classic generalist strategy, trying to win on the basis of scale and scope. Of course the modern architect of this very same strategy is none other than General Motors! Takeaway lesson: you can’t win on size alone.

But the jury is still very much out on this one, especially given that no crime has yet to be committed. And, if Sergio can actually take advantage of the massive assets he is hoping to assemble to create a series of world cars that rely on the same basic skeleton in different markets, perhaps there is something good that can come out of it. Unfortunately, the automobile industry has not been good to empire builders in the past …

Monday Morning Stress Test Update

While the fundamentals of many banks are still open to question, the Treasury has provided nothing short of a government guarantee that the top 19 banks are going to be just fine. These banks will survive; the financial system will not collapse. This is a big public service to be sure. And unremarkably, investors have taken up their cues and bid up even Bank of America and Citi, let along JP Morgan Chase and Goldman Sachs. I have three quick observations to make:

1. People evaluate their worlds on a relative, and not an absolute, scale. Compared to where we were, life is good. It may not be all that good, but relative to the recent past, we’re flying. This is a reality of how people think in many walks of life. Are you happy with your pay? Depends on what your coworkers and friends are getting. People who are generally happy with their lives have managed to create a comparison group of others that give them a chance to stand out. Are you a good tennis player? Well, you wouldn’t win a point from Rafael Nadal, or probably Chris Evert for that matter, but if you can beat some of your regular playing partners, you’re happy. So it is with the banks. Compared to where we were, we’re doing fine, just fine.

2. The race is on to return TARP money and return to some semblance of the “open market” days that enabled huge compensation packages and unfettered innovation. Sounds a little like where we’ve been again, but isn’t that how things work? From LTCM to Enron to Bear Stearns, we have an incredible ability to forget the past as soon as possible. And then repeat it.

3. There are thousands of banks in this country, but only 19 have had stress tests. The commercial real estate market is hemorrhaging, new regulations on credit cards that are sure to put a crimp in that long-time bank cash cow are on the way, and of course those bad mortgages everyone used to talk about may be forgotten, but they are not gone. There will be blood.