Rick Wagoner’s resignation and the failure of a management model

On Monday, Rick Wagoner of GM finally stepped down. Many have already written about the failure of his leadership, which oversaw the rapid decline of market share from 33% to 18%, and the drop of stock price from $70 to meager $4. He is blamed for the demise of the GM’s early electric car, EV1. He was also blamed, rightly or wrongly, for not being able to restructure GM, which apparently was the reason that he was dismissed.

I hope that the resignation of Rick WagoWagonerner is a sign of a bigger change. That is, a change of management model from the one that is based on narrow quantitative and financial calculations of shareholders’ value to the one that focuses on creating real values by making extraordinary products and services (in this case, cars). I believe such a change requires more than simple personnel change. It requires a much deeper change in the way we train our managers and the way they think.

Like many other American companies, GM’s top leadership has been recently dominated by executives with deep financial background and experiences. Rick Wagoner was CFO before he became CEO. His predecessor, John Smith, grew up in GM’s financial group. The new CEO also came through a similar path. He was CFO before he became COO, which was the job he had before Monday. So, what is the problem of having people with a strong finance background leading manufacturing firms? It can be summarized by a quote by Thomas Murphy, another former CEO of GM who also was CFO before he took the top job at GM. He once said, “General Motors is not in the business of making cars. It is in the business of making money.” Apparently, Rick Wagoner repeated the same quote during one of his interviews in 60 minutes, although I could not verify it. This mentality of business-of-making-money sounds harmless on the surface, until one starts looking at how that idea was actually implemented. That mentality led to a strategy that GM would do whatever it could to make money, in this case easy money.

GM tasted such easy money through its financing arm, GMAC. Originally founded in 1917 in order to finance dealers and buyers, GMAC rapidly expanded its operation in the real estate financing market since 1985. In 1999, GMAC bought Ditech, which was a major player in the sub-prime mortgage market. In fact, it was Ditech who invented 125% loan. From 1999 to 2005, GMAC enjoyed record-breaking years. In 2004 alone, it made $2.9 billion of net income. (Or, at least they thought so.) GM executives must have been intoxicated by the easy money that they were making. No hard work. Just run the money and let it do its job. During that same period, however, GM’s auto manufacturing business was experiencing record-breaking loss. In a three-year stretch in early 2000, GM lost $30 billion. From this analysis, it is clear that GM’s problem did not start all of sudden last September. GM’s big and fundamental problem was simply disguised and subsidized by the “profit” from the its sub-prime business (which in fact never made money) during the boom years. In a way, GM’s executives were running a large-scale Ponzi scheme. When sub-prime market blew up, all the covers were gone. There was no more place to hide.

What does this have to do with the background of the executives? Well, everything I think. Executives with finance background think and act like bankers. They do what they learned from their MBA programs. In so doing, in the case of GM, they turned a manufacturing company into a large sub-prime mortgage player. They knew little about cars. Cars and customers are reduced to single numbers. They never knew about car in the same way that Steve Jobs can talk about iPhone and Mac. They were never in the business of making cars.

This points to an even bigger problem that we face. That is, our current business education in most MBA programs are dominated by the hegemonic control by an intellectual tradition that emphasizes quantitative skills, economic reasoning, and unshakable commitment to the shareholder value as the singular objective of companies. Since 1960’s, American MBA programs have produced managers who are deeply influenced by this one-dimensional thinking. In almost every MBA program, finance is the largest major, attracting brightest students. Finance elective courses are often overbooked. Many programs require a series of finance courses as part of their “core” curriculum.

At the same time, topics like innovation, new product development and design are often pushed aside as elective courses for small fraction of students. Non-quantitative courses are often marginalized as being “soft”, while quantitative courses are marketed as scientific and rigorous. It is precisely in this intellectual context that the current crisis was born. The problems of Wall Street and the problems of GM are two different sides of the same coin. They both are rooted in the same management philosophy.

What I hope to see happens out of this current crisis is a deep reflection on how we teach and train our MBA students and corporate clients. It is time for MBA programs to look into a mirror and ask ourselves “what have we done?” I hope this will change our curriculum in a way that emphasize real stuff — material, labor, customer, products and services — as opposed to derivatives and abstract values. I hope we begin to teach our students that we cannot simply reduce everything into numbers. We must teach them that they will never be in the business of making money, but they will be in the business of making cars, computers, new energy technology, and the stuffs that the world has yet to see. They need to learn how to think and act like designers, not like a banker. We must remind them that they are makers of the world in which we live. And, we must remind them of their responsibility that comes along with that role. (I wrote on this before.) It is time for a new management model to replace the old, broken one. But, I worry whether our schools have enough guts to do it.

Professor | Writer | Teacher Digital Innovation, Design, Organizational Genetics Case Western Reserve University

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: