HARRY WILSON HATED the idea of letting go of GM. All spring he had pressed me, higher-ups in the administration, and even GM executives about the possibility of an ongoing federal involvement—"so they won't fuck up what we did," as he put it. His proposals ranged from a senior-level consulting assignment for himself inside the company to his being part of a government monitoring group that would be on hand for monthly board meetings and quarterly gatherings of senior management. The group would also help with the search for a new CFO and with decisions on supplier relations, Asian joint ventures, and more.
Ron Bloom found all this highly amusing—dealing with GM had turned Harry, the fiercest laissez-faire capitalist on our team, into an outright government interventionist. Harry argued he was just carrying out our mandate to safeguard the taxpayers' investment. But by late July, mostly because of the administration's hands-off policy, it became clear there would be no long-term role for him or any task force member inside GM. Harry was boxed between Ed Whitacre, who at the outset had elicited from me a commitment that the board would be free to run the company, and Larry, who was unyielding in his view that continued intervention would bring more risk than reward. Bowing to the inevitable, Harry proposed a sort of formal handoff: a briefing of the incoming board by Team Auto. Whitacre liked the idea, and a date was set for Monday, August 3, the day before the first formal meeting of the new GM board.
"We have been living and breathing GM for months, and we want to be very honest with you," Harry began. He was seated at the head of a long rectangular table, flanked by Ron and other members of the team, in a conference room at the GM Tech Center. Next to Sadiq, across from Harry, was Ed Whitacre, and around the table were the other directors of Shiny New GM, assembled in person for the first time. Only two of the thirteen were absent: David Bonderman, because of a long-standing prior commitment, and Fritz, who as head of current management had been excused from the briefing.
The potential for division among the new board was not lost on the attendees. Around the table, they had mostly segregated themselves into two groups—five who had been members of the board that had allowed GM to careen off a cliff and six new members who had been chosen in part because of their reputation for toughness.
Harry launched the presentation with a thirty-three-page report, which the team intentionally did not hand out in hopes of avoiding leaks about the Treasury's withering views of GM. It was organized in three main sections—GM's past successes, a recap of the bankruptcy, and GM's challenges—whose page counts alone reflected the team's mindset. GM's triumphs got three pages, including a cover page—very different from the glass-half-full presentations to which the old GM board had been accustomed. The bankruptcy recap got ten pages. And the bulk of the report dealt with GM's challenges.
Harry began the third section by laying out our scathing opinion of GM's culture in bullet points that pretty much spoke for themselves. "Insularity," which Harry called "The GM Way," came first. Then "lack of accountability," followed by "[lack of a] sense of urgency," "need for more change agents," and a "culture of losing." "If you really think about GM and where they are coming from," Harry said as he pointed to a line about consistent market-share losses for thirty-three years, "they've mostly lost. Most of these managers have never won." He also knocked the company for bad supplier relations, for GMAC's misadventures in subprime mortgages, and for the lack of "green" cars on the road.
The room was quiet. Some old board members were shifting in their seats. Kent Kresa and a few others nodded when Harry lambasted GM's bureaucracy and inability to make fast decisions. Whitacre, rarely one to speak much, occasionally murmured, "That's right."
To highlight GM's weaknesses in finance, Harry went back to one of his favorite criticisms: poor cash management. Kathryn Marinello, an information services executive who had joined the board in 2007 just as the company entered its death spiral, spoke up. "We knew something like this was going on. We were asking for that kind of information. But GM wouldn't give it to us." (Her comments struck some board members as ironic, because she had earned a reputation for talking too much at board meetings and saying too little of interest.)
David Markowitz, who felt no director of the Wagoner era should have been allowed back, glared.
Harry also harped on the need for change agents at GM, people from inside or outside who would shake the place up.
"I get it. The top management is not good," interrupted Patricia Russo, the ex-CEO of Alcatel-Lucent, who was new to the board. "But do you see that spark somewhere?"
Harry paused for a long time and volunteered a name: "Bob Lutz."
"I don't think he's that good," objected Steve Girsky, the former Morgan Stanley analyst who now occupied the UAW seat on the board.
"We like that he actually knows product," said Harry. "But we need more like him that are younger."
I would have agreed with Girsky. Lutz's swashbuckling personality stood out at fusty GM but I'd never been overwhelmed by the substance of what he had to say. And I'd been somewhat dismayed that Fritz's idea of change was to let the seventy-seven-year-old Lutz "unretire." But in truth none of us on Team Auto was a management expert.
The atmosphere seemed to become more tense as Markowitz took the floor to highlight problems related to vehicles, brands, and consumer perceptions. Old board members who had been nodding in agreement began to grow defensive. Team Auto named a few executives whom we thought were lacking, which some of the old board thought unseemly and harsh. Meanwhile, new board members muttered and shook their heads. When David reminded them about the market share loss, Whitacre offered one of his few unsolicited comments. "That has got to stop. Just can't have that," he said. From his first moment at GM, Whitacre had made clear his view that continuing loss of market share was a recipe for another failure.
The session, which was supposed to run for an hour, pushed closer to two. Finally the focus turned to Fritz—whom, after all, the task force had chosen as CEO.
"Does he have a chance at success?" Whitacre asked Harry point-blank. Another director echoed, "How positive are you that Fritz can bring about all that change that is needed?"
Harry told the board that at first he'd assumed GM would need a CEO from outside. "But eventually I realized that Fritz gets it. He has shown a capacity for change." He related the anecdote of Fritz's struggle in March to answer a question about GM's culture, and how finally he'd said, "It's the only culture I know." To Harry, this showed Fritz could recognize and be honest about his shortcomings, even in a big group setting.
Neville Isdell, a former Coca-Cola CEO who had been the last to join the old board, asked what were Fritz's odds. Bloom volunteered that Team Auto saw him as a 60–40 proposition, with some thinking he had a 60 percent chance of success and others putting it at 40 percent. Harry tried to soften things by putting his own odds of Fritz's survival at 60 percent. Even so, the directors seemed stunned. On their first day on the job they were being told they would as likely as not have to fire the CEO.
As the meeting ended and the board rose to leave, Whitacre quietly asked Sadiq for a copy of the presentation. Meanwhile, Isdell came around the table and told Harry, "You guys did a great job." In the coming weeks, many directors would tell me that they both appreciated the candor of the briefing and were dismayed by much of what they heard. None took issue with the core message.
It was not lost on Fritz that the new board was hearing from Team Auto before it heard from GM, but that had been Whitacre's wish. The next day, the board assembled at the Milford Proving Ground, northwest of Detroit, for a chance to see GM's vehicles and drive them on the test track. This helped lighten the mood. Recent models had been winning good reviews, and old board members got a kick out of hearing new members make comments like, "Wow, I didn't know Buick made a car like this."
"See, I told you it wasn't all bad," Kent Kresa told a newcomer. "There are some good things here."
Fritz had sent Whitacre an agenda for the board meeting. It would be a milestone of sorts as the first board meeting under Ed Whitacre and the first of the new GM. At the top of the agenda Fritz had put "Chairman's Review," figuring that Ed would welcome the opportunity to note the occasion and say a few words about his expectations and the state of the company. Then the board would turn its attention to the issues at hand.
But as the meeting began, Whitacre had no remarks. He just looked at Fritz and asked, "You want to make some introductory comments?"
The CEO froze, saying nothing for several seconds. Finally he said, "Welcome to the new GM." Then he simply got the meeting started, telling the board, "We have a lot of things to cover," and turning over the floor to—of all people—Ray Young.
As discussion unfolded, Fritz was kicking himself. He'd let slip an opportunity to lay out his vision and strategy for GM. He could always provide that vision in later meetings and speeches, but never again would there be a chance to set the course of the company at the start of the first meeting of the new GM board of directors.
By mid-afternoon, the agenda was finished and Fritz stepped out so the board could continue in executive session, a routine good-governance procedure. It quickly emerged that while older board members like Kresa hadn't been looking for an opening speech, new members had been. Dan Akerson said that when his firm, Carlyle, bought a company, it expected the CEO to set out his goals and vision and also impose a plan setting benchmarks for the first hundred days. The comments resonated with other directors, current and former chief executives to whom Fritz had come across as more a chief operating officer than a CEO.
Fritz's misgivings were confirmed after the meeting adjourned. Isdell pulled him aside and said, "You missed your moment." A little later, Whitacre sat down with him privately to discuss the board's initial determinations. He told Fritz the board would give him 120 to 150 days, then assess his performance as CEO. Fritz pointed out that that wasn't a lot of time. And what exactly, he asked, would he be graded on?
"Change," said Whitacre.
"How will you measure change?" Fritz asked.
Whitacre's answer seemed vague.
"I'm cooked," Fritz thought. He was disappointed but not totally surprised. He'd been wondering if Whitacre had become interested in the CEO's job for himself—he wouldn't be the first CEO to retire only to realize after a few years of golf that retirement wasn't for him. Fritz recalled how in their first meeting back in June, Whitacre had remarked, "I've never been a nonexecutive chairman. I don't know if I will be good at it."
Fritz's suspicions were understandable, but if he'd asked my advice, I'd have disagreed. I'd had too tough a time recruiting Whitacre to believe that he came into the job with any aspirations beyond seeing Fritz and GM succeed. Subsequent events would prove me correct.
While Whitacre and Fritz struggled to forge a working relationship, the chairman hit it off right away with Steve Girsky. The two couldn't have been more different: one a tall, taciturn Texan with a George Bush-like affection for his ranch, and the other a chatty New Yorker, a former star automotive analyst who'd spent years as one of the best interviews an auto journalist could have. This unlikely duo shared the view that GM's biggest enemy was itself. And they had complementary strengths. Whitacre had decades of experience managing people and running organizations. Girsky knew the industry cold and was willing to share his knowledge with Whitacre. Before long, people were calling him "Whitacre's automotive brain."
Twenty-nine miles to the northwest, at Chrysler headquarters, Sergio was unambiguously in command. He'd swept into Auburn Hills with his black sweaters, his iPod, and his packs of Muratti Ambassador cigarettes, and even while Chrysler was still in bankruptcy, he had begun interviewing top executives to figure out who would stay and who would go.
Chrysler's downward spiral had left its veterans cynical and embittered; many top managers had reported to six CEOs or presidents over the past decade. But Sergio turned out to be more laid back and less rah-rah than they'd expected. He showed none of the bad temper we'd witnessed, and instead talked quietly about who he was, his work ethic, and what he had done to fix Fiat. He was open to questions.
And he surprised the executives by letting many keep their jobs. For the most part, Chrysler people remained in charge of Chrysler operations, although power-train design and manufacturing was taken over by Italian experts, as were finance and communications. Sergio also imported Fiat people to teach his vaunted "World-Class Manufacturing" program.
On June 10, the day Chrysler emerged from bankruptcy, Sergio gave a speech to some three thousand salaried workers at headquarters. He knew it was a pretty disheartened group. As a senior manager put it, "Four months of Leno jokes wears you down." The consensus among many employees, and not resisted by Sergio's team, was that Cerberus had treated the automaker as a poor sibling to the potentially more lucrative Chrysler Financial.
Sergio told the workers he knew they'd been through a "sometimes embarrassing and difficult process" and "a great deal of hardship and uncertainty." Then he added, "It's not often in business or in life that you receive a second chance."
After laying out the challenges facing Chrysler, offset with soaring words about how the Fiat alliance would enable both companies to prosper, he pivoted abruptly at the end of his ten-page speech to introduce the African concept of ubuntu. A philosophy made globally famous by Archbishop Desmond Tutu, ubuntu roughly translates as "a person is a person because of other people."
Sergio told the employees, "When you function in such an environment, your identity, what you are as a person, is based on the fact that you are seen and acknowledged by others as a person. It is reflected in the way in which people greet each other. The equivalent to 'hello' is the expression sawubona, which literally means 'I see you.' The response is sikhona, 'I am here.' The sequence of the exchange is important: until you are seen, you do not exist."
He then told his new workforce, "From my end, as your leader, I can simply tell you that: I see you. I am glad you are here."
Early on, Sergio made two bold moves. First he gave Chrysler managers $700 million and three months to attack the quality problems and cheap interiors of the current product line. An internal study had shown that customers rated thirty-two of Chrysler's cars or trucks as "mediocre to bad." Complaints ranged from rattles, stiff brakes, and sloppy steering to the dreaded condemnation "it feels cheap." A Boston Consulting Group study showed that only 11 percent of consumers would even consider buying a Chrysler. The Dodge brand of trucks scored a little better, but still far behind rivals like Ford.
Sergio's aim was to eke out a couple more years of life from Chrysler's aging product lines, until 2012 and 2013 when new car and truck designs, many using Fiat platforms, would arrive. Those hundreds of millions of dollars bought a lot of improvements. Consumer Reports had singled out Chrysler and Dodge minivans for an inability to handle well in an emergency, hardly an appealing attribute in a suburban kid-mover. The minivans got newly designed suspensions. The Chrysler 300 and Dodge Stratus—sedans so bad they'd been lampooned on Saturday Night Live—got new V6 engines with a six-speed transmission option, plus new suspensions and tires to improve the ride. Nor was all Sergio's spending on products. He pumped tens of millions into fixing up cafeterias and restrooms in Chrysler plants as well as doing other long-deferred maintenance and repairs, all of which helped boost morale.
His second bold decision was to let retail sales fall to a "natural" level by slashing the incentives to which Chrysler had become addicted. "Buy a Chrysler—get a check" had been the joke for years. By early 2009, the company was slapping $4,400 or more in incentives on every car or truck it sold, compared with about $1,600 on average for Honda and Toyota.
Cutting incentives was a gutsy move that reflected Sergio's instinctive management style. No amount of analysis could predict how fast or how far sales would fall before they stabilized. Yet month after month he notched the incentives down. Despite the $3 billion of Cash for Clunkers money that flowed into consumers' hands, stimulating sales for most automakers, Chrysler's numbers plunged.
By November, when Sergio and his managers held a seven-hour briefing for several hundred dealers, journalists, and Wall Street analysts to present Chrysler's five-year plan, sales were down a scary 39 percent from their depressed 2008 levels. "The new Chrysler is parsimonious—cheap," Sergio said, explaining why he'd sworn off the incentives game. Behind his bravado he was probably nervous, yet he believed brand reputation was everything—he often pointed to Apple as the ideal. Years of discounting had cheapened all of Chrysler's brands, and he thought that incentives, unless checked, would ultimately destroy the company.
Watching from Washington, Ron Bloom had become increasingly uneasy. We had told Larry that the $8 billion of new money would carry Chrysler for at least eighteen months, and possibly forever. But sales were now bumping up against our worst-case scenarios, and we all knew how fast cash can disappear when an automaker's sales fall. Ron stepped up his pace of calls and e-mails to Sergio. Finally Sergio's response was direct: "What can I tell you? It will be a shitty year." This was his way of asking Ron to be patient while Chrysler kicked the incentives habit.
That did not reassure Ron. What did calm him was the company's third-quarter results. Sergio wasn't kidding about being cheap: the company had $5.7 billion in cash at the end of the third quarter of 2009, $1.7 billion more than it had at the start of the year. Despite the sales collapse, Sergio had imposed cost-cutting measures that enabled Chrysler to build up its cash. That surprised all of us. If nothing else, we had believed that Cerberus and Nardelli had been brutally focused on costs. Yet, even as he was pumping money into fixing the product, Sergio had found places to cut.
And unlike the first months of Shiny New GM, Sergio's board was happy with him from the start. We had appointed Bob Kidder, a former CEO of both Duracell and Borden, as chairman. Kidder had attended the University of Michigan and lived in Columbus, Ohio; for him, helping save a major industrial company was a labor of love. He was as undemonstrative as Sergio was flamboyant, a combination that clicked, even though Kidder spent several days a week in Auburn Hills, up in the old executive offices on the fifteenth floor of the tower.
GM's numbers were far better than Chrysler's. In its first quarter of existence, Shiny New GM sold $28 billion worth of vehicles, $4.5 billion ahead of our forecast. Top management worked fast to implement the streamlining and cost-cutting called for in our plans. The company's cash position was better than predicted too, so much so that when the White House wanted some money back to improve its political standing, GM proudly announced it would start repaying its U.S. and Canadian loans.
Yet that fall, with each passing day, the board grew less patient with Fritz. One early source of trouble was the sale of money-losing Opel. The buyer that had won the favor of the German government after tortuous, months-long bidding was Magna International, a Canada-based auto-parts maker with about $24 billion in annual sales. Sberbank, Russia's largest bank, which was 60 percent government-owned, was to be a significant equity investor.
"Sale" was something of a misnomer. Magna was essentially proposing to take the $34-billion-a-year Opel off GM's hands with the help of $6 billion in German government financing. GM would retain a minority stake, while the rest of the equity would be split among Sberbank, Magna, and Opel's employees.
GM would have preferred another bidder, the private equity firm Ripplewood, in large part because the deal would have included an option to buy Opel back—many at the company were concerned about the loss of a European presence and the lack of a midsize-car-design capability. But the German government, which had a long-standing antipathy toward private equity, insisted on Magna. Chancellor Angela Merkel, in the midst of her reelection campaign, believed the Magna deal would save jobs.
Fritz, not wanting to further prolong the ordeal, convened the board via conference call in mid-August, asking them to approve the preliminary terms. The docile board of the old GM would have blessed the deal instantly. The new board, however, resisted.
Bonderman and Akerson, the private equity duo, argued against the proposal. As professional deal guys, they hated the terms, which had been framed back in the spring when business was at its nadir. To them, a deal is not a deal until a binding agreement is signed. They felt GM should renegotiate, and if that was impossible, maybe GM should hold on to Opel and sell it in two years and get more for it as the global economy improved. Girsky was also against the sale, for strategic reasons. He argued that for GM to be a global automaker it needed a presence in Europe. And he was certain that GM needed Opel to develop midsize cars for the United States and elsewhere.
It would not be the last time that Bonderman, Akerson, and Girsky teamed up to challenge a management proposal. GM executives came to nickname them "the three amigos." But almost all the directors were skittish about the Magna deal. Kresa said that GM should consider keeping Opel now that the U.S. economy was improving. Isdell agreed that a global company needed a large European operation. Another member of the old guard, Phil Laskawy, mostly kept silent, willing to go with whatever the majority decided, but chimed in that it was a poor deal for GM. The consensus was that this was too important a decision to make via conference call.
Fritz was forced to wait until the September board meeting. There, Opel was high on the agenda, and after more discussion, he won the directors' reluctant approval for the preliminary terms. But it was clear to everyone that this was far from a done deal. The European autoworkers had yet to agree, for one thing, and the European Union also had to approve.
The rest of the meeting did not go any better for Fritz. As the directors worked their way through the day's agenda, they came upon a request to finance the development of a new engine called the Ecotec. To GM, this highly efficient four-cylinder design represented a critical improvement. It was slated to become the largest-volume engine in GM's lineup, to be used in small cars, midsize sedans like the Malibu, and crossover vehicles like the Chevy Equinox. Every GM brand except for Cadillac would feature it, and it would occupy three or four engine plants employing thousands of workers. Fritz and his team saw the proposal as routine; at $1.2 billion, in the old days it barely would have qualified for board-level attention. It occupied a single page deep inside the board book, $650 million for Phase I and $550 million for Phase II, with a resolution of approval attached.
Team Auto, of course, had bounced back many such requests for lack of substance and analysis, but the lesson had not sunk in. "What would you do if you got this at Carlyle?" Bonderman asked Akerson, who snorted in response. Other new directors were also perplexed. It didn't help management's cause that John Smith, the stubborn, imperious group vice president, was overseeing both the Ecotec and the troubled Opel deal. Smith bristled when one of the board's newcomers suggested that the proposal should include an analysis showing critical metrics such as return on investment. Car companies need new engines to boost fuel economy and meet U.S. standards, he answered impatiently. They don't calculate what they will get from the investment, another executive added.
This didn't sit well with Bonderman. "Back where I come from, we first have to justify why we need a new engine," he shot back. "Then you would give us a series of materials justifying how much it would cost and why. Let's make it easy. Assume you need an engine. What's the rate of return?"
The executives were now baffled and upset. In their minds, cars need engines, and when an automaker develops a new one like the Ecotec, no one knows for sure which vehicles it will go into. They also did not believe—with some justification—that a rate of return on a single element of a car can be accurately calculated.
They were more baffled when a new board member asked why an engine couldn't just be purchased from somewhere else. Automakers see engines as the core of their business and are very reluctant to farm them out, especially engines expected to be as widely used as this one. Both the executives and the old directors felt that the newcomers had a lot to learn. The new directors viewed exchanges of this sort as further confirmation that Harry and his colleagues had spoken the truth in their August 3 presentation. And the more they got to know GM executives like Smith, the more they thought that a personnel housecleaning was in order.
Fritz eventually tabled the discussion. He told his team to proceed with the design and engineering of the Ecotec while the financial staff developed the analysis the board wanted. In part because of the unusual nature of the request and in part because of GM's hidebound accounting systems, the analysis would take two months and untold man-hours. Bonderman rejected the first version, forcing the work to be redone before the board finally voted to approve the Ecotec.
The confrontation left a bad taste on both sides. Word of friction between management and board began to leak into the press, with anonymous executives accusing the board of wasting time and getting too involved in the nitty-gritty at GM.
Whitacre stayed out of such debates, but the uncertainty in the boardroom about Fritz's status inadvertently seeped into public consciousness when he, and not Fritz, suddenly emerged as GM's TV pitchman. A sixty-second commercial that debuted on September 13 featured the GM chairman wearing a dark suit and a red tie and striding through a brightly lit automotive design studio in a campaign called "May the Best Car Win."
"Before I started this job, I admit I had some doubts—probably a lot like you," he tells the viewer in his soft Texas drawl. "But I like what I found. I think you will too."
He then launches his pitch. "Car for car, when compared to the competition, we win. It is as simple as that ... We're putting our money where our mouth is ... Put us to the test," Whitacre says, offering a sixty-day, money-back guarantee. "Put us up against anyone, and may the best car win."
The commercial was reminiscent of Lee Iacocca's iconic Chrysler ads thirty years earlier, challenging America, "If you can find a better car, buy it." It left industry watchers wondering what was going on inside GM. Some saw it as a signal of Whitacre's interest in being more than a nonexecutive chairman. Others speculated that Fritz had put Whitacre up to it in hopes of ingratiating himself.
In fact, the decision to put Whitacre on the air was made by the GM marketing department. Marketing was among Whitacre's passions, as he'd made clear to me during our first trip together to Detroit. He hammered constantly at the staff, complaining that GM did a poor job of selling people on its cars. He liked the "May the Best Car Win" concept, and wanted somehow to acknowledge taxpayers for the help they'd given GM. The challenge, of course, was to make the message ring true—the bailout was immensely unpopular, and taxpayers didn't like to be reminded of it. Whitacre resisted being in the commercial at first, but then told the marketers, "If you test the crap out of it, I will do it." In market testing he came across as credible. Someone with his folksy drawl obviously wasn't part of the team that had driven GM to ruin.
The commercial ran for barely a week, but with constant replay on cable TV news and on the Internet, it created an impression that Whitacre was now in charge—or soon would be.
For Fritz, the Opel deal was a nightmare. Negotiations dragged on into the fall. Germany's 1.5 billion euro bridge loan was keeping the company solvent, but ironically, it removed any real urgency to close the deal. The European autoworkers still hadn't fully agreed to terms. Magna founder Frank Stronach, a crusty and notoriously tight-fisted Austrian-born entrepreneur, seized every opportunity to haggle. This gave even Ron Bloom misgivings; he called Fritz repeatedly to complain that Magna was continually recutting the deal to squeeze GM.
Then the European Union completed its review, only to kick the problem right back into Fritz's lap. Worried about the impact of Germany's loans on Opel's commitment to other European countries, it requested a formal reevaluation by the GM board. All of this was just as I had told President Obama in regard to Chrysler back in March: a deal that looks iffy at the start typically only gets worse. With so many governments involved, Opel was beyond typical. In fact, GM was on its way to creating an international incident.
By November 3, as the directors assembled for the monthly board meeting, their sentiment had clearly swung toward keeping the European unit. Pat Russo, for example, noted that other automakers make money there, so perhaps it was just a question of improving Opel's management. She also observed that Opel was strategically positioned to take advantage of the growing central European market.
Fritz, who'd run GM Europe and Opel, doubted that the business could ever generate a profit. He believed that GM should finish the deal it had started. Wasn't jettisoning money-losing operations the kind of tough decision the new GM should embrace? Europe was a mature auto market where competition was as ruthless as in the United States, or more so. And tough restructuring moves were harder to make in the heavily regulated EU. The board's resistance started to feel to Fritz like a pretext to run him out of his job.
Kresa and others, meanwhile, were surprised that Fritz didn't respond to the board's increasing skepticism of the Opel deal. The world was different now, and GM actually had cash and no longer needed a fire sale. What the board wanted were options. But all Fritz offered was the Magna transaction.
No one in Detroit appeared concerned, or perhaps even to be aware, that Chancellor Merkel was in Washington that day, where she was to address Congress. This was her first visit to the United States since her reelection in September. Perhaps mindful of that, the Opel union announced that morning it had agreed to concessions that would have saved 265 million euros a year if GM proceeded with the deal, thus removing one of the final obstacles. But none of this seemed of consequence to the GM board, which now voted to back out. Just hours after the union announcement, GM declared that it had decided not to sell Opel, and that it would restructure the company instead.
Merkel was completely blindsided, much to the Obama administration's chagrin. Fritz called her aides to convey the news just before she was to board her plane home. By all accounts, she was furious. She made no public statement, but by the next morning her ministers blasted GM, and one of her aides called for the company to repay the bridge loan. The autoworkers threatened mass demonstrations. Other European leaders, as well as Russian Prime Minister Vladimir Putin, chimed in. And Treasury spokesperson Meg Reilly said in a statement, "The Administration was not involved with this decision, which was made by GM's board of directors."
After that November board meeting adjourned, Fritz and Ed sat down to strategize. Fritz told Ed it "would be hell" in Europe following this decision, but volunteered to cancel a planned trip to Brazil to go to Europe "and take all the bullets on this thing."
It was hard for Fritz not to believe that the unraveling of the deal might cost him his job. So he asked Whitacre point-blank, "If you're going to get rid of me, let me know now because I've got better things to do with my life."
Ed reassured Fritz he was not being fired and should fly to Europe. All the same, rumors continued to swirl, even after Whitacre publicly expressed support for Henderson a week later, telling Bloomberg News, "The Board is fully behind Fritz; he's working hard."
In reality, opposition to Henderson was mounting, especially among the new directors who had always been skeptics. Bonderman and Akerson were thoroughly disenchanted. Girsky was unhappy with what he saw as disarray in GM's sales and marketing. Carol Stephenson, the Ontario business school dean who occupied the Canadian board seat, had arrived under the influence of officials who had negotiated her nation's share of the bailout. The GMers had struck the Canadians as highhanded and dismissive of outside ideas. While generally quiet in board meetings, Stephenson expressed concerns that GM wasn't giving the board the data and details it needed to make informed decisions.
Change—or lack of it—had become a major sticking point. Many directors felt that GM's presentations remained too optimistic, just as the task force had warned. And even though Wagoner was gone, board members saw some of the old arrogance, including a resurgence of the view that GM's bankruptcy was not its fault but rather was due to the financial collapse and economic downturn. Patricia Russo was so put off that she suggested to Fritz that he tell his executives to quit talking as though GM were such a top-notch company; it still had a long way to go.
Some members of the old board, including Laskawy and Kresa, were inclined to give Fritz more time. Compared to Wagoner, he was a believer in change. During his brief tenure as interim chairman, Kresa had coached Fritz about the need to bring in new blood. Fritz had duly read up on other companies and cultures. But recruiting outsiders for top posts wasn't his strength; he remained doggedly loyal to GM people and ways. Ray Young was still CFO. His decision to bring back Bob Lutz left many on the board scratching their heads. And when Katy Barclay, the head of human resources, finally resigned, Fritz proposed a GM manufacturing executive to take her post.
Whitacre and the board had asked Fritz to reduce the number of his direct reports, in part by naming a chief of GM North America, a position Fritz had eliminated when GM emerged from bankruptcy. But Fritz resisted. In one tart exchange, he told Whitacre that people would simply go around the North American head to the CEO to get their way. Whitacre replied that it was the CEO's job not to let that happen.
Throughout the fall, board members discussed among themselves what to do. I talked periodically to a number of the directors and sensed growing and widespread unhappiness with Fritz. But Whitacre put off all talk of replacements; he had promised Henderson at least 120 days—until early December—to show what he could do, and meant to honor that commitment.
By the time of the discussion in the executive session after the November board meeting, it was clear to all that Fritz would be asked to leave in a month's time. The problem was whom to replace him with. For reasons much like our decision to replace Rick with Fritz, no one believed that GM could be left rudderless while a search was conducted. Nor, of course, were there any potential successors within the executive team.
So the board looked in its own midst for at least an interim solution. Girsky wanted the job, but while he was well liked and highly respected, no one thought he was ready to be CEO of General Motors. Akerson, a former CEO, declined to be considered, citing his obligations to Carlyle and lack of enthusiasm for living in Detroit. Directors began to wonder whether Whitacre could be pressed into service.
Fritz could sense rumblings, but he was in the dark. On November 30, the day before the December board meeting, he decided to end the suspense. His calendar called for him to leave right after the meeting to be the keynote speaker at the Los Angeles auto show; he asked Whitacre whether he ought to keep to his travel plan. The chairman told him to hang back. Although the board had not yet made a formal decision, Whitacre knew with virtual certainty what would occur the next day. About the same time, he phoned Ron Bloom to give him a heads-up that the board was likely to fire Fritz. This didn't surprise Ron—he'd been in the camp that had rated Fritz's chances of success at 40 percent.
The next morning, the board plowed through its regular agenda. Afterward, in an executive session that lasted less than five minutes, the directors voted unanimously to relieve Fritz. Then the board turned to Whitacre, securing his assent to become interim CEO while a search for a permanent replacement was conducted.
When Whitacre delivered the news to him a few minutes later, Fritz had two reactions. He told Whitacre he didn't want to stay on if the board didn't want him. And he asked, "Could I have done anything differently?"
For some reason, Whitacre answered "No."
A little later, Whitacre pulled Girsky aside. "You with me on this?" he asked. He offered the former auto analyst a full-time job as a top adviser, with the title of vice chairman. Girsky was elated, but since his responsibility on the board was to represent the UAW, he said that Whitacre should call Gettelfinger to get his approval.
Whitacre reached the UAW leader, who asked, "When are you doing this?"
"In about thirty minutes," Whitacre replied.
"Nothing gets done at GM in thirty minutes," Gettelfinger said, laughing. But he readily agreed. It couldn't hurt to have the UAW board designee doubling as consigliere to GM's CEO.
Before the public announcement, Whitacre assembled many of Fritz's direct reports in a thirty-eighth-floor conference room—executives such as Ray Young, the global head of manufacturing and labor relations Tim Lee, and GM's new head of human resources Mary Barra.
"Fritz Henderson has decided to step aside and the board has accepted that decision," he told them. "I will step in as interim CEO."
There were few happy or relieved faces; mostly the executives responded with a mix of anger and sorrow. "I was handpicked by Fritz, so if you had a problem with him, then you probably have a problem with me," Lee said and offered to step down on the spot.
"Hey, hey, I am not taking anyone's resignation tonight," said Whitacre. "Fritz is the least surprised person right now. This is the way it has to be. We all have to stand together." The last thing he wanted was a mass exodus, which would look really bad in the media. A little later, in a hastily arranged press conference, the company released the news to the world. Fritz Henderson, the first CEO of the new General Motors, was gone. It had been 247 days since I had asked Rick Wagoner to step aside and Fritz Henderson to take his place.
Fritz's ouster drew headlines. "GM CEO Fritz Henderson Abruptly Sent Packing," declared USA Today. But for the most part, bigger issues like health care reform and stepping up the war in Afghanistan had long since eclipsed the bailout on the front page.
The company retained Spencer Stuart to search for a permanent CEO, determined to secure a superstar like Mulally. But the target list was small, because the board wanted only candidates who had already served as chief executives, which of course Mulally had not before joining Ford. Living in Detroit was another turnoff for candidates, as was the prospect of facing the government's pay czar. Not a single candidate had been interviewed when Whitacre did an about-face and told the board, "Hell, I'll do it." But he refused to make the two-year commitment that the board requested, promising instead to stay long enough to carry the company through an initial public offering. To the outside world, the announcement in January 2010 that the GM board voted to remove the "interim" from Whitacre's title confirmed the impression that Ed had, indeed, flunked retirement.
Whitacre's impact as CEO was dramatic. Within days of taking command, he reorganized the company's sprawling sales and marketing operation and announced Mark Reuss as president of GM North America, the position that Fritz had resisted creating. Soon afterward, Ray Young was gone as chief of finance, replaced by a surprise recruit from the tech world, Chris Liddell, the former CFO of Microsoft. Liddell was appalled at what he found, from GM's inability to assess its cash position to its habit of delivering data without insight—he told his three thousand staffers worldwide that such data were useless. He ordered an immediate and sweeping overhaul of the company's financial systems.
The changes at the top accelerated, and by the time he had been in place ninety days, Whitacre had eased out four top-level executives, reassigned twenty more, and brought in seven outsiders to fill top jobs. Vice chairman Lutz announced his re-retirement on March 3 and Whitacre cut back on direct reports. GM's executive committee now consisted of twelve people, nearly all of whom were either new to their jobs or auto industry rookies, like Ed Whitacre himself.
The shakeup caused growing consternation inside GM, to the point where Whitacre felt it necessary to send a calming message to the troops. "I want to reassure you that the major leadership changes are behind us," he wrote in an e-mail in late March, after reorganizing the marketing department for a second time. "The team we have in place today is the team that will take us forward."
Now that he was a full-time auto executive, Whitacre got an apartment in downtown Detroit, in the same complex where Steve Girsky lived. He used a hefty chunk of his new compensation package of $9 million a year to charter private jets to fly up to the city from San Antonio on Sunday night and back on Friday afternoon or evening, a cost of government oversight that irked him no end. As he revamped the leadership, Whitacre made it a point to mingle with rank-and-file employees. He would show up in the RenCen's food court to eat a fast-food lunch among GM middle managers, and used the same elevators as they did, often greeting a fellow rider with, "Hi, I'm Ed. Who're you?" In May, he showed up unannounced at the Detroit-Hamtramck Assembly Plant wearing jeans and a sweatshirt and with no corporate ID. After waiting in the lobby for twenty minutes while someone tracked down the plant manager, he was let in to wander around and chat with workers. Getting out to meet employees, he told his lieutenants, enabled him to ask if their bosses were delivering on promises they had made. He was equally down-to-earth in his interactions with Gettelfinger, having breakfast with him at Gettelfinger's favorite diner.
Simplicity was Whitacre's favorite message. He crusaded to eliminate meetings, streamline reports, and drive down decisionmaking to lower levels of management. At a "future product design" meeting, a quasi-ritual assembly of senior design directors traditionally attended by the CEO, he abruptly stood up and said, "You are all smart guys, right? You know what to do," and left the room. Whitacre liked to remind people that the CEO did not have to be involved in every single issue. His job was to set long-term strategy—like whether GM should create an in-house finance company now that it was no longer tied to GMAC—and to offer inspiration and guidance. After that, if he was smart, he would get out of the way.
Board meetings changed too. They ran hours shorter, wrapping up by 11:30 A.M. so directors could catch planes home in the early afternoon—very much as Whitacre had described to me over dinner in Washington back in May. He seemed to know what information the board wanted to see, and they seemed to agree with the majority of his decisions. Whitacre also made it clear he wasn't looking for or encouraging much oversight, even from Bonderman and Akerson, who'd been such thorns in Fritz's side. Some directors, recalling the confrontations with Fritz, laughed privately that the board was now almost as deferential to Ed Whitacre as the prebankruptcy board had been to Rick Wagoner. In the minds of the directors, they didn't have much choice: Whitacre was the only man to do the job, and he was only going to do the job on his terms.
The simplicity mantra didn't always go over well with battle-scarred GM veterans, however. Just before he was named CEO, Whitacre attended a town-hall-style meeting at the Tech Center in Warren. He told the engineers that the job of GM was "to sell more cars and more trucks for more money. Period." This sounded simplistic to the engineers, and they bombarded him with questions on process and protocol, which he batted away. By the time he addressed another gathering of engineers a few months later, he had sharpened his pitch: "If your bosses are asking you to do something that is not about selling more vehicles or fixing quality, question what they are doing." The engineers were pleased; this was the sort of simplicity mandate they could relate to.
From the perspective of selling cars, Whitacre's timing could hardly have been better. Not only did the recession seem to be ending, but on January 21, four days before his CEO status was made permanent, Toyota found itself in the largest product safety scandal in its seventy-seven-year history. It recalled millions of vehicles and suspended sales and production on more than half its U.S. models, including its best-selling Camry, because of faulty accelerator pedals that could stick, causing uncontrollable acceleration.
The problems marred the sterling reputation of the world's largest automaker. By February, Toyota executives were facing congressional hearings and grand jury inquiries as consumers came forward with heart-wrenching tales of vehicles accelerating out of control and killing loved ones. All three Detroit carmakers benefited from Toyota's crisis: Ford sales jumped 43 percent in February, and GM's rose 12 percent. Chrysler's also rose, just 0.47 percent, but its first monthly increase since 2007. More importantly, the Detroit automakers continued to pull back on rebates and low-interest offers—narrowing, at least slightly, the incentive gap with Toyota.
Two problems that had beset his predecessors remained intractable for Whitacre. Opel was still losing money—$500 million in the first quarter of 2010 alone—leaving unanswered the question of whether the board had been right to keep the European operation. Not only was GM obliged to pay back the bridge loan Germany had provided, but also the German government declared it would offer no longer-term support. This meant GM was now on its own to face restructuring costs estimated at 3.3 billion euros. Whitacre believed that the new labor agreement in Germany would cut the losses in half, and if the German government continued to play hardball, production could be moved to places like Poland to further reduce costs.
Dealers posed a more difficult problem. Their proponents and lobbyists on Capitol Hill had drowned out the automakers' arguments as well as a firm declaration from the White House: "The Administration strongly opposes the language in the bill that attempts to restore prior Chrysler and General Motors franchise agreements," it began. In December, as part of a $1.1 trillion spending bill for 2010, the House and the Senate tucked in a provision guaranteeing to every dealer closed as a result of the bailout the right to seek reinstatement through arbitration—laborious and distracting for the companies. Sergio immediately threatened to sue, though the new law would have a far smaller impact on Chrysler, which had cut off unwanted dealers so quickly and brutally that it would end up having to reinstate only a handful.
General Motors, however, was paying the price for having been considerate. It had given franchisees eighteen months to wind down, so almost all of the 2,000 dealers slated to be closed were still in business. Whitacre had no choice but to relent. In March, GM said it would retain some 660 dealers it had initially planned to shut down. By August, another 65 had gotten a reprieve.
This left the domestic dealer network at 4,500, well north of the 3,600 that GM and Team Auto had concluded, a year earlier, made sense. Officially, Whitacre maintained that a bigger network would be good for business: more dealers should equal more sales, especially in rural and suburban areas. I wasn't so sure. If more dealers were better than fewer, then why weren't the transplants seeking to add more dealerships? I had heard many industry experts emphasize the need to reduce the number of stores. And in our conversations, Fritz had agreed.
Any criticism of Whitacre's management shakeup or of GM's ongoing problems was muted by the company's better-than-expected performance. It posted its first quarterly profit in almost three years in the first quarter of 2010, exceeding Team Auto's projections handily. Its net income of $865 million wildly outpaced a first-quarter 2009 loss of nearly $6 billion. Revenue jumped 40 percent globally, despite the elimination of the Saturn, Hummer, and Pontiac nameplates.
Business had turned around so demonstrably that by spring Whitacre was having regular conversations with Ron Bloom about a public offering. The goal of many in the Obama administration, including Larry Summers, had long been for a stock sale in late 2010—not coincidentally around the time of the midterm elections. Now Whitacre embraced the idea. He felt an offering that got the government back some more of its money and reduced its ownership stake would ease animosity among the car-buying public toward "Government Motors." This animosity wasn't just in GM's imagination: Ford had reams of data showing that consumers were considering its Focuses and Explorers because Ford was the sole Detroit automaker that hadn't taken a handout.
Looking toward a November IPO, the U.S. Treasury issued a public request on May 10 seeking a bank to serve as GM's underwriter. This was a plum opportunity in the wake of the financial crash. Not only did GM have a shot at becoming the largest IPO in history, but in the future it would also need lines of credit, revolving loans, and other services. All the top banks threw their hats in the ring, each dispatching to Washington on May 19 a team of no more than five people and a pitch book of no more than twenty pages, as the Treasury had carefully specified.
Ordinary sales teams these were not: Bank of America and Morgan Stanley brought their CEOs, Goldman Sachs brought its president, and Citi had its CEO, Vikram Pandit, call in. Each presentation had an unabashedly patriotic tenor, emphasizing what a great advertisement for America it would be to cap a fast, successful government bailout with a triumphant return to the public markets.
As might have been expected, Jimmy Lee's pitch took the cake. A year earlier, during the Chrysler talks, he had angrily declared that he would steer clear of doing business with the government and that JPMorgan was "making a list" of industries, like autos, that it would avoid in the future because of government interference. But a brightening economy, an uptick in car sales, and an auto industry newly freed of leverage and legacy costs had prompted Jimmy to reconsider. To underscore the importance of the deal to JPMorgan, he'd brought his CEO, Jamie Dimon, down with him on the Acela.
GM's IPO would be "a historic day for America," Jimmy told the assembled Treasury and GM officials. The bank's pitch book, its cover emblazoned with "The Best Car Wins," included a copy of an old Wall Street Journal article about JPMorgan's funding of a GM deal in 1920. Jimmy also volunteered that the bank would be willing to take its fees in GM equity. And to anyone who was interested, he showed pictures on his BlackBerry of his new $110,000 cobalt blue ZR1, a top-of-the-line Corvette. He'd bought it to demonstrate his commitment to the product.
Bloom did not miss the opportunity to tease. "Oh, you like us now," he said to Jimmy. Others asked if Jimmy would like to visit the old rooms at Treasury where he and I had butted heads.
In the end, GM picked JPMorgan and Morgan Stanley as co-lead managers. The Treasury drove a hard bargain on fees. On a mega-IPO, the banks would typically keep 2 to 3 percentage points of the "gross spread"—the difference between the public offering price and the price per share paid by the underwriter. But Bloom and his team argued that the chance to be part of this once-in-a-lifetime deal warranted a big discount. The two banks agreed to a 0.75 percent gross spread after another bank, Goldman Sachs, offered to work for that low fee.
On August 12, just days before an expected filing of an initial public offering prospectus, GM threw its throng of observers and stakeholders a curve. In the middle of a second-quarter earnings call, whose good news had been thoroughly previewed by Whitacre the previous week, the chief executive suddenly announced that he would be stepping down on September 1 and that director Dan Akerson would replace him. The analysts and reporters were stunned. Wild rumors circulated—had the government pushed out the tall Texan just as it had Rick Wagoner?
The board had been just as surprised a few days earlier when Whitacre had informed them in the executive session portion of its regular monthly meeting that he was quitting. The only clue the board had received was in the advance agenda: extra time had been allotted for the executive session. The directors were far from thrilled. Whitacre wasn't perfect—he hated detail work and wasn't regarded as a genius—but his decisiveness and emphasis on speed had been just what GM needed. A brief effort was made to talk Ed out of his decision, but Ed was not a man who changed his mind.
Several directors felt left in the lurch. Just as when they had asked Fritz to leave in late 2009, GM had no internal candidates (this was one of many management problems that remained to be addressed). With the IPO looming, there was no time to organize and conduct a search. Once again, the board would have to look among its members for a chief executive.
Three potential candidates—Akerson, Russo, and Girsky—were asked to step out of the room while the others deliberated. ("We should ask everyone" if they want to be considered, Kathy Marinello said, in one of her usual half-baked comments, annoying the other directors.) They narrowed the list quickly. Girsky was not seen as a plausible replacement—no real management experience. And while Russo had done well as GM's lead director, her past performances as a chief executive had been rocky. That left Akerson.
In my view, he was the right choice. Akerson and Whitacre possess the same kind of toughness and decisiveness. Akerson, younger and more energetic, will likely have even less patience for the old GM ways than Whitacre did. Once he became so impatient with doctors who were treating his gallbladder in a German hospital that he removed the tubes from his arm, checked out, and flew back to the U.S. On top of that determination, he brings the private equity sensibility I value highly.
My former Team Auto colleagues David Markowitz and Sadiq Malik had been Akerson fans since he told them at their first meeting how much he had hated losing a golf game the day before on the eighteenth hole. "He was more passionate about a round of eighteen than most of the employees at GM were about their company," David remarked to Sadiq after the meeting.
His sole potential disadvantage is age. At sixty-one, Akerson may wish to serve only for a few years, which would necessitate yet another change at the top. Despite this, he might well have gotten the job even if the board had conducted a full-blown outside search. His name, after all, had been floated twice before, when Fritz was fired and again at the beginning of the abortive search to replace Whitacre when he was still interim CEO. On both occasions Akerson had declined to be considered. But by spring, he was kicking himself for letting the opportunity slip. He had come to realize that he'd much preferred his years as a chief executive at General Instrument and other companies to being a private equity guy. A former naval officer, he also saw becoming CEO of General Motors at this crucial point in history as an opportunity for public service.
Choosing GM over Carlyle entailed a major financial and personal sacrifice for Dan. It meant walking away from a massive amount of Carlyle equity for lonely, grueling workweeks in Detroit, with weekend commutes home to Virginia at his own expense. Though Dan took the job without knowing how much he would be paid, the compensation was sure to be low by CEO standards. Whitacre's compensation had been limited to $9 million a year, mostly in the form of stock, placing him in the bottom 25 percent of comparable CEOs, and the same government strictures on executive pay would apply to Dan.
As glad as I was to see Akerson step up, I shared the board's disappointment with Whitacre. He had promised to see GM through its initial public offering, which the directors took to mean that he would stay until at least mid-2011. (A company can't market an IPO if it knows of impending management changes, and in any event, the board would want to mount an orderly search for a more permanent chief.) Instead he forced GM to scramble to appoint its fourth CEO in less than eighteen months. If anyone had asked Jack Welch, I'm sure he would have advised against this rapid shuffling of CEOs.
I was also disappointed when I heard that Akerson would become chairman as well as CEO on December 1. Nothing has occurred to change my view that "best practices" in corporate governance means separating the chairman and chief executive roles. And if ever a company needed to hew firmly to best practices in corporate governance, it is the one that owes its existence to the support and goodwill of the American taxpayer: shiny new General Motors.