Is Shutting Down GM’s SUV Line an Exercise in Corporate Responsibility?

On 3 June 2008 General Motors announced that it would close four of its truck plants and move away from building SUVs. On 23 June it amended this to 7 plants. The move was said to be in order to adjust cost structures in line with GM’s energy-efficient competitors in Japan and, from a public relations perspective, looked responsive to mounting concerns over global warming. The market welcomed the news by briefly halting the share price’s recent descent. In its apparent reaction to consumers’ declining demand for gas-guzzling SUV’s, GM could be seen to be joining the growing number of firms putting climate change on the corporate agenda.

But the move comes after the car maker lost $3.3 billion in the first quarter of 2008. For the year it expects to sell 400,000 cars short of its forecast; blaming rising fuel prices for the decline in sales. 19,000 jobs were cut for the purposes of reducing $1 billion in costs, in an effort to improve the company’s long-term prospects. Although the circumstances leading to GM’s performance might appear unforeseen, the situation mirrors the one the company found itself in 18 months ago. In January 2006, the manufacturer reported its fifth consecutive quarter-on-quarter loss. It was only through slashing car prices that it sustained car sales; again citing climate change and fuel prices as the cause of reduced customer interest in its large people carriers. At that time it cut 30,000 jobs and closed 12 production plants.

GM is now in its fourth year of negative earnings, and its share price is still dropping from a high of above $40 in October 2007 to below $13 in June 2008. Its cost-cutting efforts have failed to result in medium-term growth; and the long-term outcome is far from assured. By putting tens of thousands of people out of work GM risks further depressing an already-sluggish economy, potentially reducing the number of people able to afford their cars in the future. In addition, negative sentiment towards the company may deter buyers who are sympathetic to the plight of the ex-employees.

The action raises questions about GM’s strategy. The company is struggling while the rest of the market enjoys growth. The same concerns about rising fuel costs and climate change have affected all manufacturers in the industry; yet Japanese manufacturers have not only survived, but prospered. European car manufacturers, too, have risen to the challenges of the changing competitive and physical environment. Even local competitor Ford has confronted climate change as an opportunity to innovate, retooling at least one existing truck plant to produce smaller, more efficient cars.

Why then is GM so behind in the game? Who is responsible for the company’s persistent focus on trucks? The company developed perhaps industry-edge technology for large vehicles, but let their passenger cars draw further away from customers’ preferences. In the meantime, the rest of the industry has not only adjusted to, but pre-empted, major changes in the competitive landscape.

A growing body of literature has been developing around the board of directors’ role in driving change and innovation. Contrary to conventional wisdom which suggests that boards should focus on minimizing risks, renewed emphasis is being placed on boards’ responsibility to act in the broader interests of shareholders. Because share owners can take a portfolio approach to investing – balancing predictable returns in stable industries, with potentially high rewards from high-risk holdings in dynamic industries – boards are in the best position to encourage innovation. This is especially so when the environment is extremely uncertain, since managers tend to avoid making changes which could work out badly and for which they might get fired, or at least punished financially.

In GM’s case, then, while management looked skeptically at the issue of global warming, disputing its severity or cars’ contribution to the state of the atmosphere, was it not up to the board to push management to think and plan ahead? And if any board is in the position to look beyond the firm’s existing operations to global conditions and potential innovative solutions, is it not GM’s? Replete with veterans of the most innovative companies, as well as those who advise corporations on how to be innovative and strategic, this group of individuals is in a unique position to guide the corporation on how best to leverage its skills, to build and use technology to improve efficiency, and to lead the market with new, competitive products.

Sure, the result is not guaranteed. But could it be worse than the company’s current situation? Concern about climate change might not be guiding the firm’s interest in rethinking its strategy; but if board members don’t lead the firm in anticipating and adapting to new industry drivers, are they not acting irresponsibly with respect to their duties as, and on behalf of, the corporations’ owners?

June 24, 2008
By Lisa Papania, Research Director, CIBC Centre for Corporate Governance and Risk Management