GM and GE are dragging corporate America through the mud
General Motors (GM) and General Electric Company (GE) used to be the most highly respected names in corporate America. Now their reputations and stock prices are shot. So is the credibility of their CEOs. And since their boards -- whose legal role is to protect the shareholders -- have protected these CEOs instead of the shareholders, the loss of credibility extends to the entire system of American corporate governance.
Why the loss of credibility? Until the 1970s, GM was the dominant player in the global automobile industry. But thanks to its failure to respond effectively to competition which offered better quality and service, GM has suffered a steady decline, interrupted for a few years here and there with prosperity driven by cheap gas and an appetite for SUVs and trucks.
For the last year, GM has said that bankruptcy was off the table. Now GM says bankruptcy is imminent -- in GM's 10K its auditor says there is "substantial doubt" about GM as a going concern. With $82 billion in losses since 2006 and a 95% collapse in its stock price, why has GM's CEO kept his job?
Meanwhile, GE was an American icon for generations right up to the end of Jack Welch's tenure as CEO. Under the current CEO Jeff Immelt, GE stock has lost 83% of its value, but at least GE was committed to keeping its $1.24 a share quarterly dividend until February 5, 2009. Of course, all that changed 22 days later when GE announced it was slashing that dividend 68% to save $4.2 billion. And after touting its commitment to keeping the AAA rating, its recent 10K declared GE might need to pay out $8.2 billion if its AAA credit rating drops four notches, below AA-.
It makes no sense to me that a public company's stock price would drop over 80% and the board would continue to support the CEO. In the case of GM, where the company is officially on the brink of bankruptcy, is the board protecting shareholders by keeping in charge the CEO who led the company to that point? Or is GM's board just protecting itself?
For those who build American business, the question is whether the CEOs need to go or whether the system in which they operate is fundamentally flawed. I'd say both. What about you?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns GE shares has no financial interest in GM securities.