In corporate governance, the right people count more than the right structure

June 24, 2010

On the one-year anniversary of the GM Bankruptcy an article in the Wall Street Journal draws 3 lessons.  We agree with the author that these “might sound blindingly obvious, but it’s amazing how frequently they’re ignored,” and believe a good venture partner helps address such issues through joint ownership and alignment of interests.

1. Problems denied and solutions delayed will result in a painful and costly day of reckoning.
2. In corporate governance, the right people count more than the right structure.
3. Appearances can be deceiving.

The second lesson – on good governance – is one we’ve made before: systems and best practices are important but members’ informal modi operandi determine whether or not all those well-designed systems function properly.  How this applies to the specific example of GM and Ford:

On paper General Motors was a model of good corporate governance, while Ford was (and is) a disaster. The Ford family’s super-voting Class B shares give it 40% of the votes with less than 4% of the shareholder equity. Class B shares get about 31 votes for every share of the Class A stock that nonfamily members own. And the Ford family gets veto power over any corporate merger or dissolution. This structure seems to fly in the face of what is generally understood to be sound principles of good corporate governance. Such “undemocratic” provisions are sure to be lamented this month at two major corporate-governance conferences: the ODX (Outstanding Directors Exchange) in New York, and the annual confab at the Millstein Center for Corporate Governance at Yale. But the Ford board of directors and family came together in 2006 to seek a new CEO from outside the struggling company, even though that meant family scion Bill Ford Jr. had to relinquish command. He volunteered to do so and remains chairman, but not CEO. Meanwhile, the GM board, consisting of blue-chip outside directors who chose a “lead director” from their ranks, steadfastly backed an ineffective management from one disaster to another and wrung its collective hands while the company ran out of cash. Some GM retirees dubbed the directors the “board of bystanders.”

Ford’s governance may not look good on paper, but at least they found the wherewithal to do what had to be done – this time. The next time – and there is always a next time in the up & down that is the business cycle – they’d be better served by better practices. But that is an easier problem to fix than GM’s, which has more to do with getting the team to deal more frankly and forthrightly with the issues at hand and each other.

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