Leadership Crises in Industry
By Leslie Pratch
A friend recently, discussing the types of leadership crises facing companies, upheld GM as a model of ethics but one which suffered from bureaucratic inertia. British Petroleum, on the other hand, he believed, suffered from poor public relations: “The CEO has had his foot in his mouth the entire time.” At its root, however, he did concede that the crisis stemmed from aggressive risk taking. Chalk it up to capitalism, he would say. And Goldman, Sachs, though large, has not even profited during the recession. Its leadership crisis is the public perception of questionable ethics.
I respectfully disagree with my friend’s characterization of GM as a model of ethics. I would criticize all the car companies over the world with lack of ethics including their behavior with suppliers. The one leader in the industry who behaved ethically has been Tom Stallkamp who at Chrysler did NOT extract extract price concessions. (Stallkamp had been a director at Baxter and at BorgWarner and was an Industrial Partner at Ripplewood Holdings L.L.C., a New York private equity group, since 2004, the international auto parts supply sector. Ford was in between Chrysler and GM. If you were a supplier, Ford would wear you out. But if you hung in there, you could collect.
GM used to be one of the best companies in the world. When Ignacio Lopez, the former purchasing czar at GM, came into power the 1980s, GM became adversarial. It killed the goose that laid the golden egg; it killed the supply base. What really was out of whack at GM was its internal cost structure, which critics attributed to Lopez’ aggressive cost cutting. Honda was able to be profitable but did not try to cut a new deal once it entered into a supply agreement. By contrast, under Lopez, GM did a bait and switch, enraging the supply base. GM never went with the one company that had predominance on international bids.
In 1993, Volkswagen hired Lopez shortly before the CEO of GM would announce Lopez would be promoted to head the company’s North American operations. GM accused Lopez of misappropriating trade secrets. German investigators began to probe Lopez and Volkswagen after prosecutors linked Lopez to a cache of secret GM documents investigators found in the apartment of two associates of Lopez. Volkswagen, facing plummeting stock prices, forced Lopez to resign. GM and Volkswagen reached a civil settlement, in which Volkswagen agreed to pay GM $100 million and to buy $1 billion worth of parts from GM.
GM is changing and the changes are culturally pretty deep. It is getting rid of most of the executives who came up the system, and as a result, the culture is changing. GM had destroyed the relationships it had with the supply base, which enabled it to reduce prices while maintaining high internal costs.
The automotive and heavy truck industry has a used car dealership mentality, a mentality which permeates the entire industry-up to the CEO. What has been lacking is trust, which has forced both the suppliers and the car companies to talk out of both sides of their mouths.
But now that GM has led the way by hiring leaders from outside the industry, the United States may have a shot at a viable automotive industry. One can hope.
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Leslie Pratch, Ph.D. is a clinical psychologist from the Northwestern Medical School with an M.B.A. in Strategy and Finance from Chicago Booth and a B.A. in Religion from Williams College. She works with boards of directors of public companies as well as private equity investors to assess and develop executives. She can be reached at (312) 464-7919 or leslie@pratchco.com or www.pratchco.com.
