WMBA 511 – Corporate Governance

University of Michigan – Ross Business School

Christopher Bommarito
Ahmed Elgammal
Jyothi Gubbala
Brian Haas

[GENERAL MOTORS CORPORATE GOVERNANCE]

Table of Contents
Executive Summary....................................................................................................................................... 2
General Motors Before Bankruptcy .............................................................................................................. 3
Derivatives lawsuit ........................................................................................................................................ 4
Partnerships with Chinese Companies ......................................................................................................... 5
Government Ownership ............................................................................................................................... 6
Conclusion ..................................................................................................................................................... 9
Citations ...................................................................................................................................................... 10
Executive Summary

General Motors’ management and board of directors have been under scrutiny since their

inception in 1908. This report will focus on the corporate governance challenges facing GM

shortly before the government bailout in March 2008 and subsequent IPO in November 2010.

The report will not focus on corporate governance issues encountered during GM’s long history

before this period. Best corporate governance practices tell us that an independent board is more

effective at delivering a non-biased recommendation for the firm in question. Automotive

companies headquartered in Detroit have historically had a difficult time appointing independent

board members, however, due to the location’s heavy concentration in automotive companies.

GM’s lack of independent board members combined with a poor corporate culture for a number

of years led to a number of issues, notably a costly derivatives lawsuit, a government bailout,

bankruptcy, and company restructuring. Post-Bankruptcy, however, GM has been able to correct

much of its governance issues and our analysis indicates that it currently has sound corporate

governance policies. GM now has an independent, diverse and involved board that has

proactively installed committees charged with monitoring practices and identifying potential

violation of corporate or legal policies. Despite these positive signs, however, GM still faces

several governance risks related to Duty of Loyalty, Duty of Care, and Independence among its

board members. GM is exposed to governance risk through its partnerships with Chinese

corporations that do not possess the same governance standards that it currently does. Finally,

GM faces challenges due to U.S. government ownership. The U.S. government still owns a

significant portion of GM resulting from the 2008 bailout package. As GM continues rebuilding,

it faces potential duty of loyalty and duty of care issues as it tries to please the U.S. government

and other shareholders.

General Motors Before Bankruptcy

Throughout General Motors’ 104 year old history it has been considered a dominant player in

automotive industry. Despite its financial success, however, governance issues existed that

contributed to its eventual bankruptcy filing in 2008. GM’s culture was slow to change, highly

bureaucratic, and scornful of competition. GM’s employees were expected to be team players

and to not question any decisions made by senior management. There was little accountability

and it was a place where no one took responsibility for the decisions that were being made. Prior

to 2008, GM’s Board was comprised of 13 directors, of which 6 had served on the board since

1996 while most of the remaining directors came on board in 2003 with a few exceptions

[1,2]. As a result, Rick Wagoner, CEO and Chairman of the board, has been accused of having

disproportionate decision making power and that the remaining board members were effectively

rubber stamping his decisions.

Most of the board members had similar professional and personal backgrounds and many had

close ties to the auto industry. Additionally, GM faced higher costs because of its obligations to

pension funds and retirement funds compared to its competitors. The company lost an average of

$1500 for every GM car sold. GM had waited too long to strike a deal with UAW on cuts in

pension funds 3. GM and UAW had reached an agreement on September 2007. While GM had

faced financial problems, the board did not make sure that GM took a tough stance to reduce its

liabilities and cut its capacity when the company was producing more than what it could sell.

The board members were too slow to react when GM has been losing market share compared to

its competitors [4]. Board members who have been added since 2004 have more diverse

background.
Furthermore, since GM was considered dominant institution, most of the board members viewed

being director at GM as a prestigious position to hold rather than paying attention to their duties

and acting with diligence [5]. A board needs to be inquisitive and hold management accountable

for failures within its control. More importantly they need to realize they represent the

shareholder of the company and need to make decisions that are in their best interest.

Derivatives lawsuit
A derivatives lawsuit known as “The GM Securities Action” was filed against GM on

September 19, 2005. “The derivatives lawsuit alleges that GM issued false and misleading

statements and made material omissions regarding GM’s revenues, expenses, cash flows, and

earnings (among other financial disclosures) and its financial condition.”[6] GM’s management

and board of directors broke their fiduciary duty of trust by allowing false and misleading

financial statements to be released. There was also a clear duty of care violation on the part of

the board because the fraud was deemed by the courts as something that should have been easily

recognized.

The obvious disregard for the company and its shareholders by the board of directors and GM’s

management proves a lack of leadership and integrity. “After a Court sponsored Mediation, on

July 21, 2008, the parties agreed to a $303 million Settlement of the case, memorialized in a

Stipulation and Agreement of Settlement dated September 16, 2008. Its terms include GM

paying $277 million.”[5] The board of directors was asleep at the wheel while GM management

falsified financial statements creating mistrust amongst shareholders and a loss of value for

GM. This is an example of poor management and corporate governance practice by the pre-

bankruptcy GM. Additionally, Rick Wagoner was not removed from his position. In fact four

months prior to the court sponsored mediation the board of directors approved giving Wagoner a
$1 million annual raise and $500 thousand stock options, bringing his compensation package up

to $14.9 Million. It could be argued that other managers are more responsible for the mistrust

that caused the derivatives lawsuit, however Wagoner was compliant or ignorant and either case

would be enough for his rightful termination. If the board of directors had been composed of

independent, active, and capable members with sufficient understanding to challenge the

fraudulent reporting, they would have recommended a management change and may have

avoided the future bankruptcy and current government intervention.

Partnerships with Chinese Companies

The Chinese automotive market has seen tremendous growth in the past decade, rising from less

than 1.8 million vehicles sold in 1999 to over 13.65 million in 2009[7]. China thus possesses the

fastest growing automotive market in the world and its growth is expected to accelerate (some

forecasts expect it to reach 30 million cars by 2018) [8]. This type of growth makes China a

critical long term strategic target for major automotive manufacturers like General Motors.

Chinese laws require foreign corporations that wish to do business in China to partner with

Chinese firms and evenly split all profits earned in the country. This mandate combined with the

pressure to expand in the market as well as different level of attention paid to governance issues

by Chinese corporations (Chinese companies have a much lower rate of independent board

members than western companies and have seen a number of recent fraud cases) [9], has allowed

less opportunity for foreign companies to partner with well governed and responsible Chinese

corporations. This environment could expose GM to governance risk and subsequent financial

loss if it is not able to partner with a responsible Chinese corporation.

GM has recently chosen to partner with SAIC (Shanghai Automotive Industry Company) in

China and has formed a Joint Venture called SAIC-GM-Wuling Automobile. While SAIC does
not have a history of fraud, its board of directors contains few independent members, putting it at

risk of poor governance practices. SAIC’s governance policies could fail to stop poor labor

practices or safety standards at locations owned or contracted by its Joint Venture with GM. Poor

labor practices could severely impact GM’s global reputation and may lead to consumer boycotts

of their vehicles. Poor safety standards could lead to further damage to GM’s reputation and

could open the door for litigation against GM by its customers in China.

Due to the aforementioned growth in the Chinese vehicle market, if GM’s JV with SAIC is able

to capture a sizeable portion of the market, it would dramatically increase its revenue. On the

other hand, this could also increase the amount of risk GM is exposed to if SAIC’s governance

policies do not stop financial fraud. If SAIC’s board fails to halt fraud within its company or its

JV with GM, this could open the door to litigation against GM by shareholders, potentially

causing it to be liable for losses incurred due to SAIC’s practices. SAIC’s governance issues may

only impact GM’s activities in China, but due to China’s key strategic position in the global

landscape, this could prove to be a critical failure. This would be especially true if GM’s main

US competitors are able to partner with a responsible and profitable Chinese firm and capitalize

on Chinese growth.

Government Ownership
As part of the GM bankruptcy bailout package in 2009 the United States government took

control of GM. The U.S. government infused $49.5 billion, in GM, which resulted in

approximately 60.8% in common equity of the company[12]. After becoming the majority

shareholder the U.S. government appointed GM’s new board of directors to make sure that the

U.S. taxpayer’s investment was being managed with care. In 2011, GM issued a new IPO

raising $15.77 billion[13]. The U.S. government, however, still retained close to a 30%
ownership share in the “new” GM after the IPO[14] With the U.S. government still owning a

significant number of the shares in company, can the GM separate owner from regulator?

In 2011, GM launched the much anticipated Chevy Volt. The Volt is Chevy’s first primarily

electric powered car that can go 100 miles on a charge before needing a gasoline engine assist or

recharge. During a government investigation, shortly after the Volt’s launch, there were reports

that three fires broke out a few days after a side impact crash [15]. The bad publicity prompted

Akerson to offer to buy back any Volt, from any owner who felt that their car was not safe and

would catch fire [16]. Thus far only a few dozen of the 6,400 Volt owners have asked for GM to

buy back their car [17]. The Volt safety controversy raises the question if GM would have

fought back more aggressively against the safety claims if the U.S. Government wasn’t the

largest owner? It also raises point whether or not the board of directors and management upheld

their duty of loyalty by offering to buy the cars back and make dramatic safety changes. Did

GM management even have a choice of fighting back since their largest shareholder is also the

safety regulator? The board’s and management’s response could easily fall back on the business

judgment rule. If they felt it was in the best interest of the company to admit wrong doing and

make the car safer then that was a valid choice. On the other hand the safety controversy did

tarnish GM’s safety reputation and fighting back could have potentially limited the public

scaring.

GM is also facing challenges with executive compensation. Part of the U.S. government’s

bailout package placed caps on executive compensation. Even though GM is now publicly

owned again, these pay caps are still in place until the U.S. government sells the rest of their GM

stock [18] GM’s Mark Ruess and Dan Akerson are worried about losing talent to Ford and

Chrysler. [18] “We have to be competitive and attract and retain great people. We’ve been able
to that. But we’re starting to lose them, “Akerson said in December 2010. [18] GM is currently

working with government to see if they can get pay restrictions eased. In order for GM to

succeed they need to continue recruiting high talent and be able to pay them. The U.S.

government claims that they are looking out for the taxpayer’s investment in GM, but one could

argue that GM needs to be able to hire top talent in order to compete at a high level which will

ultimately drive up the share price high enough where the U.S. government can sell the rest of

their shares at break even and exit GM ownership.

Another potential governance concern is that a majority of GM board members have been

appointed by the government. Since board members were not appointed by shareholders, there is

a potential Duty of Loyalty concern. In cases where politically charged business decisions must

be made (union negotiations, plant shut downs, etc.) board members may feel pressured to make

decisions that impact the company based on political alignment rather than sound business

judgment. This will cause GM to be vulnerable to shareholder lawsuits if shareholders feel like

GM executives and board members are not acting on their behalf. For example, the board could

be questioned by shareholders if GM does not push for the most preferable financial position

during Union contract negotiations as at the expense of GM profitability. The risk here is most

likely minimal since most decisions made by the board that could be deemed political could most

likely be defended by the business judgment rule.

GM and the U.S. government both agree that private ownership is the best solution for the

company. However after GM is no longer partially owned by the U.S. government will they

retain the board of directors selected for them by the U.S. government? The future of GM will

depend on its management and board of directors to carry out their fiduciary duty of loyalty to

GM’s shareholders and stakeholders.

Conclusion

While GM has been a victim in many ways of broad economic instability, poor management

decisions and little board oversight exacerbated its problems heading into the financial meltdown

of 2008. The government takeover in 2008 saved it from collapse but presented its management

and its board of directors with new governance challenges to navigate. Despite its challenges,

however, GM has responded remarkably well since the government takeover under the

leadership of an improved board of directors. Its board is more diverse, active, and independent

than it has been throughout its history and is honoring its fiduciary duties. It will need to

continue to actively monitor management decisions and corporate policy in order to mitigate the

risks posed by its new economic and political landscape. The risks posed by its expansion into

the Chinese automotive market and government ownership are large but its current board

structure and its improved corporate culture leave it poised for future success.
Citations
1. General Motors Corp 10K – 2005 America's Corporate Foundation; 2005; ProQuest Historical

Annual Reports

2. General Motors Corp 10K – 2003 America's Corporate Foundation; 2003; ProQuest Historical

Annual Reports

3. Union- bash or bust , June 8th 2005 , Economist – The Print Edition

4. General Motors : The lost years , June 9th 2005, Economist, The Print Edition

5. Corporate Governance by Robert A. G. Monks, Nell Minow – 2008

6. GM Securities and Derivative Litigation - Frequently Asked Questions." GM Securities and

Derivative Litigation - Home. Web. 28 Jan. 2012. <https://www.gmsecuritiescase.com/FAQ.aspx>.

7. "GM Board Restores CEO Rick Wagoner's Salary, Sets Pay for New COO | MLive.com."Michigan

Blogs & RSS Feeds - MLive.com. Web. 28 Jan. 2012.

<http://blog.mlive.com/statewidebusinessstories/2008/03/gm_board_restores_ceo_rick_wag.html>.

8. Union Bash or Bust , June 28th 2005, Economist Print Edition

9. http://e2af.com/trend/100317.shtml

10. http://blogs.wsj.com/drivers-seat/2012/02/10/china-car-sales-to-top-30-million-by-2018-j-d-power-

says/?mod=google_news_blog

11. http://www.forbes.com/sites/kenrapoza/2011/06/14/china-believers-stand-firm-despite-fraud-

cases

12. Pyke, Jim, “Getting Our Money Back: Did the Bailout Work?”, http://seekingalpha.com/article/234060-getting-

our-money-back-did-the-gm-bailout-work.

13. Baldwin and Kim, “General Motors Co GM.UL pulled off the biggest initial public offering in U.S. history on

Wednesday, raising $20.1 billion after pricing shares at the top of the proposed range in response to huge investor

demand”, http://www.reuters.com/article/2010/11/17/us-gm-ipo-idUSTRE6AB43H20101117,
14. “Owner as Regulator, Like Oil and Water”, New York Times,

http://www.nytimes.com/2012/01/14/business/government-ownership-and-gm-regulation-dont-

mix.html?pagewanted=all

15. Koening, Brian, “House Republicans Question Safety of Chevy Volt Batteries”,

http://thenewamerican.com/tech-mainmenu-30/environment/10665-house-republicans-question-safety-of-

chevy-volt-batteries

16. Koening, Brian, “GM Offers Buyback for Chevy Volt Owners Fearful of Battery Fires”,

http://www.thenewamerican.com/tech-mainmenu-30/environment/10031-gm-offers-buyback-for-chevy-volt-

owners-fearful-of-battery-fires, accessed 2/7/12

17. Thompson, Chrissie, “Few Dozen owners ask GM to buy back their Chevrolet Volts”,

http://content.usatoday.com/communities/driveon/post/2011/12/few-dozen-owners-ask-gm-to-buy-back-their-

chevrolet-volts/1

18. “GM’s Reuss worried about losing workers due to government pay restrictions”,

http://www.menafn.com/qn_news_story.asp?storyid=%7B525bfc35-65f6-4d8f-952b-

11200990114d%7D&src=main