Directors dump Stempel, Reuss, turn to Jack Smith
John Smale: Leader of the inquisition
It was collective instinct rather than rumor or gossip, a background hum as faint as a distant radio station. But to the clubby group of executives who had spent years climbing to the top of the world's biggest manufacturing company, the vibes that winter were as clear as writing on a wall.
"You could kind of smell the anxiety," Jim Perkins, then general manager of GM's bread-and-butter Chevrolet division, recalled in a recent interview. "In a corporation like GM, you get a sense of things like that, the unrest. We knew that something big was going to happen."
But what? The answer, when it came, would be as explosive as a howitzer round.
Perkins, now 83, said that in March 1992, he was given a "tap on the shoulder" to meet with director John Smale in a suite at the St. Regis Hotel, across the street from GM's massive limestone-and-marble headquarters building in Detroit's New Center area.
Smale, then 64 and a GM director for 10 years, had retired recently as chairman and CEO of Procter & Gamble. In January, he had begun intensive one-on-one interviews with GM's division heads and department chiefs to get their take on the automaker's problems.
There was plenty to talk about. To many observers, GM appeared to be in a death spiral.
The company had lost a record $4.45 billion in 1991, including a staggering $7.1 billion in North America, as its U.S. market share slumped to 35 percent. Costs were out of control. According to an internal study, GM spent $800 more per car on labor than Ford Motor Co., while producing lower-quality vehicles.
Ominously, Wall Street was threatening to strip GM of its top-grade investment rating, a step that would make it much more expensive for the company to borrow the money it needed to fund daily operations. And GM shares were trading at a 41/2-year low — under $30.
Mike Losh, then head of Oldsmobile, recalls a pervasive fear among his contemporaries at the time that the company was foundering.
"The concern was, is this big corporation still economically viable?" Losh, who retired in 2000 as CFO, said in a recent interview. "If you had asked a broad cross section of the organization, that would've been the prevalent concern."
Pressure from shareholders
Pressure to tackle GM's problems with greater urgency had been building for months. Big institutional shareholders such as the California Public Employees Retirement System, the nation's largest public pension fund, had become increasingly critical of the company's direction and were pressuring directors for answers — and results.
Ira Millstein, a New York lawyer and legal counsel for GM's outside directors since 1985, also had been prodding the board to take action. If it didn't, he warned, it would be vulnerable to shareholder lawsuits for misfeasance or nonfeasance, given the state of the company.
"The principle is very unambiguous," Millstein, 81, said in a July interview. "Directors are responsible to shareholders for overseeing a company's management. That responsibility is heightened in the case of a troubled company."
Activism did not come naturally to the board, which had been little more than a rubber stamp for management for much of the company's history. But with their spines stiffened by Millstein's warnings, the 11 outside directors on the 17-member board had begun pressing CEO Bob Stempel the previous fall for answers and a fix-it plan.
Smale, in a legal artifice crafted by Millstein, was named "lead director" and given the job, essentially, of staying in Stempel's face.
Stempel, a well-liked engineer who had succeeded Roger Smith as chairman and CEO in August 1990, was slow to respond to the pressure.
After several directives from the board, Stempel, then 58, had cobbled together an emergency plan for shrinking the floundering company. The plan was announced Dec. 18, 1991. Stempel called for shutting 21 assembly plants over three years, the elimination of 74,000 jobs and the sale of several nonautomotive operations.
But the outside directors, who had begun meeting in secret to monitor and discuss the situation, were far from pleased with what they saw as Stempel's inconsistent approach to GM's problems.
No clear answers
"We could never get a clear answer from him on anything," one source close to the board said. "He was just not up to it."
By the time of Perkins' meeting with Smale, the already-thin ice under Stempel had begun to crack. Smale made that clear in his line of questioning, Perkins recalled.
During a two-hour interview, Perkins said, it became obvious that Smale was highly distrustful of the quality of information being fed to the board and the media by Stempel and his hand-picked president, Lloyd Reuss.
Smale read some Chevrolet quality and customer satisfaction index numbers to Perkins and asked, " 'Do these numbers sound foreign to you?' " Perkins said.
"I had to answer yes, because they were all much more positive than what I had reported. ... In fact, they were pretty enviable numbers. And he said they were the numbers the corporation was handing out to the media to show how things were improving at GM. I told him I could only vouch for the information I reported."
It also became clear, Perkins recalled, that Smale was looking for heads to chop.
"You could easily tell ... he was trying to get at who was at fault for the company's problems," Perkins said. "You could tell from the questions that he had the knife out for certain people. There was no question of that."
In fact, by then Smale had decided to limit Stempel's powers as chairman and to fire Reuss, who would be replaced as president by Vice Chairman Jack Smith, head of international operations.
In the previous two years, GM had made $4.5 billion overseas under the 54-year-old Smith while losing $ 11.7 billion in the United States under Reuss.
Smith was known as a guy who got things done. He had established a three-shift car plant in Spain, consolidated production at two plants in Belgium, upgraded productivity and quality at GM's operations in Britain and led GM into eastern Europe.
Setting up NUMMI
Smith also had been GM's point man for putting together the highly successful NUMMI joint venture with Toyota in California.
Reuss, known throughout the company as an inveterate optimist, was widely criticized for holding lengthy, accomplish-nothing meetings and for a reluctance to make decisions.
Unknown to Stempel, Smale met with Jack Smith in late March at a motel in Dayton, Ohio, and asked him to take over as president.
"He told me that the board wanted to make the change, and they wanted me to take on the assignment," Smith recalled in a June interview. "I said I would, and would certainly do my best."
The die is cast
With Smith on board, directors made their move. On April 6, in an action that rocked Detroit and sent tremors through most of corporate America, the board announced that Smale would replace Stempel as chairman of GM's powerful executive committee, responsible for setting the automaker's priorities and goals.
Simultaneously, two of Stempel's closest allies, the 56-year-old Reuss and Executive Vice President F. Alan Smith, 61, were demoted and booted off the board. CFO Robert O'Connell also was demoted and sent to GMAC.
The moves effectively emasculated Stempel. As chairman of the executive committee, Smale now would control GM's agenda, meaning directors in effect would be voting on their own priorities and programs rather than management's.
At the same time, the personnel moves left Stempel without close allies on the board or in the executive suite.
Smith, the new president, was on the board but had not worked closely with Stempel. And the new CFO — 57-year-old Bill Hoglund, promoted from head of the massive Automotive Components Group — was a former head of the startup Saturn Corp. who bitterly resented Stempel for having removed him from that job.
In a statement justifying the putsch, the board said it acted because it sought "more aggressive management" in slashing GM's costs, bureaucracy and the number of plants. Directors had not exercised their powers so forcefully since an earlier board fired company founder Billy Durant in 1920.
But they weren't done.
Six months later, on Oct. 26, 1992, a demoralized and despondent Stempel gave in to escalating pressure from directors, along with several leaked news stories that he was on his way out, and resigned. Stempel, the first engineer to become GM's chairman and CEO since the 1950s, had been in the job just 27 months.
Reuss, F. Alan Smith and Robert Schultz, 62, vice chairman in charge of the GM Hughes subsidiary, also resigned.
At the November board meeting just days later, directors named Smale chairman and Jack Smith CEO, marking the first time since 1958 that the two titles had been uncoupled at GM. Smale also became the first nonexecutive chairman since Lammot DuPont, who served from 1929 to 1937.
Directors thus had wrested control of the world's largest manufacturing company from a generation of executives who had invested most of their lives working their way up the GM corporate ladder. In fact, it appeared to some that directors had blown up the ladder.
Landmark power shift
The insurrection is viewed today as a landmark in a shift of power from managers to corporate directors, who traditionally had acted more as yes-men than decision-makers. The move spurred a revolution in corporate governance among Fortune 500 companies, with the boards of IBM, American Express and Westinghouse Electric, to name only three, later ousting their CEOs.
"What happened at GM reasserted the board as the supreme authority of a company," industry observer Dave Cole said in a 2000 interview.
But Stempel often is portrayed as a scapegoat for blunders he inherited from Roger Smith — blunders that GM's directors did nothing to stop. "He became captain after the Titanic had already hit the iceberg," one Stempel supporter says.
One burden passed on to Stempel was Roger Smith's reorganization of GM's North American operations into two clumsy megagroups in the mid-1980s: Chevrolet-Pontiac-Canada and Buick-Oldsmobile-Cadillac.
The reorganization sandwiched a new level of bureaucracy between the divisions and GM headquarters, resulting in miscommunication, costly duplication of effort and a proliferation of look-alike, tough-to-sell models that dragged down GM's results on Stempel's watch.
Roger Smith's creation of Saturn, although ultimately a success, also saddled Stempel with the costs of marketing an entirely new brand and carrying its startup losses just as the U.S. economy was entering a recession.
Gerald Meyers, former American Motors chairman and a business professor at the University of Michigan, says Stempel was not given a proper chance to undo the damage of the Smith era and turn the corporation around.
"If Moses himself sat in the CEO's office with the task that Stempel was given, even he would have been found wanting," Meyers says.
Sharing the blame
Meyers and others also argue that directors themselves bore a huge responsibility for the problems that led to the board coup and the ouster of Stempel and Reuss.
Hoglund recalled telling that to one of the directors, former CBS Inc. Chairman Thomas Wyman, in a heated meeting between the two.
"Where in the hell have you guys been for the last 10 years?" Hoglund, in an interview in May, said he demanded of the startled Wyman at the time of the coup.
"You never asked a question. You sat and just listened to Roger Smith; you went along with buying Hughes and EDS and Saturn and all that bullshit, and you never questioned a thing. You guys ought to be ashamed of yourselves for letting the company get into this state."
Stempel, now 75, subsequently was chairman and CEO of Energy Conversion Devices Inc. from 1995 until 2007. Today he contends that the board just panicked.
"The numbers looked pretty big, and the board got nervous," he said in a June interview.
"I've never been scared by those big numbers because this business can turn on a dime. You can see that today with the situation in trucks ... a huge source of profits suddenly drying up. You have to have a steady hand on the throttle in this business."
But Millstein, who provided the insurrection's ideological framework, counters that the board gave Stempel and Reuss every possible chance to turn things around.
"There was no panic by the board," Millstein said.
"There were frequent conversations between us (the board) and Bob Stempel in which our concerns were made clear to him. Every possible effort was made to convey our sense of how urgent we felt matters to be. But he wouldn't move. He didn't seem to get it."