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Michael Useem
Scholar

Michael Useem

Michael Useem is Professor of Management and Director of the Center for Leadership and Change Management at the Wharton School of the University of Pennsylvania.

Governance Traditions

The decision by the U.S. government to become a majority owner of General Motors is without precedence in modern times. Without a proven road map to guide its ownership, the Federal Government will certainly want to be mindful of American governance traditions.

Owners elect a board of directors to represent their interests, and they do not normally seek to direct the directors. Rather, they delegate all the major decisions - selecting the chief executive, setting strategy - to the governing board. Owners expect to be kept well informed of the company's performance, but the relationship remains one of arms length. Short of a crisis, owners try to keep their hands off the operations they own. This pattern might be called governance principle #1.

The exceptions to this principle, however, are notable. In 1992, for instance, owners outraged by General Motors' declining performance successfully pressed the board to dismiss its chief executive. And this hands-off rule has been modified in the case of owners who hold a larger than normal fraction - something north of 5 to 10 percent - of the ownership. When private equity firms take a large stake in a company, as they often do in startups like eBay, one or more of their partners typically join the board and take an active role - as owners - in guiding company executives. This is also a well established tradition, and let's call its governance principle #2.

In this case, the company and the country will be well-served by principle #1, the hands-off approach. The U.S. as majority owner of General Motors will want to appoint a relatively small board (better for making timely decisions) of experienced company managers (better for making good decisions). The government will certainly want to make its mission clear to the directors - something like restoring the company to profitable production and making fuel-efficient automobiles and preparing GM for early return to private ownership - and then not interfere with executive decisions to achieve that mission.

Of course the U.S. will also want to remain extremely vigilant - as any major owner would, according to principle #2 - to ensure that the new board compels the executive team to pursue the owner's mission during the next several years. If its mission is not achieved, however, like private equity owners, the government could and should insist on replacing the directors - and placing some its own direct representatives on the board as it embraces principle #2.

By Michael Useem

 |  June 1, 2009; 11:07 AM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: A Buyer of Last Resort | Next: "Hands Off" Has Failed

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