Why Boards Should Be Proactive, Not Reactive

When the Obama administration moved to force the resignation of General Motors CEO Rick Wagoner over the weekend, questions immediately arose about the role of the GM board and whether it should have recognized the need for a change in leadership — before the government itself decided to take action.

Wharton management professor Michael Useem, an expert on corporate governance, notes that directors who "only monitor what an executive has done abrogate a bigger responsibility, which is to work directly with management on company strategy." One of the most significant changes of the last decade is "that independent, non-executive directors have become more directly involved in setting strategy. Did this happen at GM? I don't know. But it appears GM's board was not able to force the company to change, and, like Rick Wagoner, was not thinking strategically about what might happen to GM in the longer run."

Useem says the government's decision to force Wagoner's resignation is not a good model. "Independent non-executive directors have an enormous obligation — in addition to protecting shareholder value — which is to bring in the right top management team and get the wrong one out. To rely on a bankruptcy court, creditors or the U.S. government to make that change is probably a terrible precedent."

Indeed, says Useem, "everyone in the clutches of the government at the moment — whether their company is involved in a bailout plan or is getting TARP money — is probably looking over their shoulder, wondering whether the shoe could drop on them. If I were [Citi CEO] Vikram Pandit, [AIG CEO] Edward Liddy or [Chrysler CEO] Robert Nardelli — and indeed, he could be next — I would have a conference call today with my board to talk through what needs to be done to ensure that the biggest decision a board can make is not delegated to the U.S. government."

To outward appearances, Useem says, the GM board has been overdue on forcing restructuring. "The best time to restructure is when you don't have to. Wagoner has been in office since 2000. If a CEO [during that time] was not ready to take such measures as cutting production lines, getting rid of gas guzzlers and [reining in] expenses, that's where the board unequivocally does have a strategic function to be more proactive than reactive, more aggressively intervening."

Useem says that earlier this morning, a colleague of his "quoted today's Wall Street Journal headline — 'Government Forces Out Wagoner at GM' — and asked, 'In our lifetime, would you ever have expected to see those words?' It's a stunning headline."