It is already December and it is time for corporations to have at least started their reviews for how to improve in 2009. Those reviews will involve many management reviews, and many companies would do better with a new CEO. General Motors Corporation (NYSE: GM) may seem like too easy of a pick to start out with on a list of companies which need to replace their CEO. But Rick Wagoner needs to leave GM for a number of reasons. Unfortunately for Mr. Wagoner, GM is likely going to need to remove him from the CEO role and from the Chairman role. This is not just over what has happened in the past. What lies ahead for GM is a rocky road that will require new leadership and swifter actions.
As far as our criteria, we do not want to just pick managers to leaveon share prices alone nor do we want to just single out managers introubled sectors. So why does Rick Wagoner not get a pass when therehas been a very similar destruction in value over at Ford Motor Co.(NYSE: F) under Alan Mulally? Or what about Bob Nardelli’s reign atChrysler, where private equity hasn’t made much difference either? One of the most simple reasons is that he has the longest tenure of thethree. Rick Wagoner was elected GM chairman and chief executiveofficer on May 1, 2003. He had been president and chief executiveofficer since June 2000. Wagoner holds a Harvard MBA and we do notthink there is an issue with his intellect. We do not believe thatthere are any honesty or ethical issues. But there is now a seriouscredibility gap which has now gone above and beyond a "fall of duty" inthese rough times.
The economy is not Wagoner’s fault. We aren’t even pinning all of theissues around the UAW nor the fall of American cars to foreign cars onhim. Those are all concerted forces which one man and one team cannoteliminate today.
While we do not call out a CEO for share price alone, the destructionof value at the company has been a disaster. Is GM really worth thesame as it was in the 1950’s, 1940’s, or 1930’s? That depends uponyour evaluation and calculation. But regardless of where GM’s stocktrades, the value destruction here is almost impossible tofathom. Add in the raw losses of 2007 that are now many times thevalue of the current price, and it is mind boggling. Unfortunately forWagoner, this all came about under his watch.
Wagoner alleges that a Chapter 11 filing will lead to a collapse. Ifthe filing is handled poorly that would likely be true. But if thecompany can get the government to backstop certain obligations ratherthan write a blank check, then that will likely not be the case. Ifthe company can secure a check from Uncle Sam that will guarantee thewarranties and service operations for a period of ten years, thenthe argument that no one will buy its cars diminishes. The sadtruth is that right now the cars are selling at a level that it looksand sounds the same as no one wanting to buy them any way. Thepublic is not exactly rushing out to buy cars right now and is notlikely to rush to new car lots in 2009. But by 2010 or by 2011, theaverage age of cars will be more in the favor of the auto sector as USconsumers will be closer to needing a new ride whether times are toughor not.
The most recent report of a proposed debt for equity swap is nearlylaughable. If you hold debt in the company today, why would you riskyour spot in line before any restructuring occurs? Debt holders aregoing to have more pull here than stockholders, and that is likely tohold true where GM opts for Chapter 11 or manages to avoid it.
Mr. Wagoner’s ‘presentation’ in front of Congress in November was aboutas poor of a presentation as a troubled company CEO could have made.Forget the point the Wagoner (and rivals) flew the company jet toWashington to hold out the tin cup and say "Help a manager out."Forget about CEO pay and compensation arguments for this case.Wagoner’s answers to questions regarding the cash burn rates, thetimetable to zero, and the state of the books were as full of logicalresponses as the answers a 5-year old offers up when parents ask whathappened to a missing bag of cookies.
The additional problem is that the reliance on SUV’s and being slow tomove into hybrids was under his strategy. He has kept on too manybrands and far too many models in the U.S. If Wagoner really wanted toget rid of the Hummer, he has waited far too long. Even with lower gasprices it will be a tough sell and it will come with a basement saleprice. Some of the current UAW contracts that are hurting the companyare also under his watch after a "too-brief" strike in recent years. The domestic cost cutting has also been far too slow, and the recentrevelation of the cash burn rates was astounding.
There is a sad part of the call where Wagoner needs to leave. As faras dealing with Wagoner, our understanding is that he is very fair andhas been amicable to work with. But the GM of 2010 to 2020 is going toneed a different leadership than the GM of 2000 to 2008. It seems thatWagoner’s tenure at GM is going to be limited whether he wants it thatway or not. The board has offered a vote of confidence, but thatfuture choice may also not be their choice. If GM fails, Wagoner isout for sure. If the government offers up bailout cash, it may do sowith large conditions and may demand that a new oversight managereither replaces Wagoner or that Wagoner’s duties have to be split. Ifa shareholder and debt holder coup occurs, then Wagoner will be underdirect fire as well.
At this rate, we would be surprised if Wagoner stays on as CEO into2009, although he may opt to keep the Chairman role. We would estimatewith the scenarios ahead for GM probably gives Wagoner only about a 25%chance that he will be running the show by late 2009. If he doesmanage to hang on, it will mean that he somehow engineered one of thegreatest turnarounds and recoveries in history.
Jon C. Ogg
December 1, 2008