Case Study: The Shake-UP in GMs

Hierarchy

POINT OF VIEW
The case will be studied from the point of view of a third party consultant.

CASE CONTEXT
Robert Stempel became CEO of General Motors in August 1990. Unfortunately, this decade
began with an economic recession, which inevitably took a toll on the automotive industry.
General Motors experienced big losses during this period. Members of the board and investors
sought Stempels leadership, along with his handpicked team of executives, to recover from the
slump.
In 1991, General Motors loses (industry record) $4.5 billion. Costs were out of control. An internal
study revealed that GM produced lower-quality vehicles while spending $800 more per car than
their competitor Ford Motor Co.1. Wall Street threatened to remove General Motors high
investment rating. The previous fall, the outside directors and board members pressed Robert
Stempel for solutions to the crises that confronted the organization.
On December 18, Stempel announced the plan to downsize General Motors by closing 21 plants,
including the elimination of 74,000 jobs, and the sale of several nonautomotive operations. A
subsequent announcement in February detailed plans to reduce duplication and overhead by
reorganizing the companys three car and truck operations into a single North American group 2.

1 James R. Crate. "Winter of discontent, and a boardroom revolt." Automotive News. June 1,2009.
Web

The board liked Stempels plans, but was dismayed with the pace that he intended to phase it;
Stempel proposed the cuts would not be completed until 1996.
Outside directors were far from pleased with Stempels approach. John G. Smale, former
chairman and CEO of Procter & Gamble and General Motors Director for 10 years, particularly
was seriously alarmed. He arranged meetings with General Motors Executives to discuss the
firms strategy and management. Regular secret meetings between directors took place to
monitor and discuss the situation, excluding inside directors.
On the 5th of April 1992, outside directors met in Dallas for dinner and concluded that they had
had enough. The following day, a landmark shift of power from managers to corporate directors
took place as the board of directors revolted against the companys top management team.
The Aftermath
Stempel was not the only one in the hot seat during the revolt. Many of Stempels appointed
close associates were also demoted. The board perceived that top managers lacked merit and
that these managers got ahead as their buddies got ahead. 2 For instance, Stempel insisted on
making his longtime colleague, Lloyd Reuss, to become his right hand man against the boards
recommendation. With the companys foundering performance, the board pressed on with the
ouster of GMs top management.
Ousted:
Robert C. Stempel (Chairman and CEO)
Robert J. Schultz (Vice Chairman/Head of

New Executives:
John F. Smith Jr. (President and COO)
William Hoagland (Chief Financial Officer)

nonautomotive units)
Lloyd E. Reuss (Executive Vice President)

Harry Pearce (Chairman GM Hughes

F. Alan Smith (Executive Vice President)

Electronics)
G. Richard Wagoner (CFO & EVP)
Louis Hughes (EVP International Operations)

PROBLEM STATEMENT:

2 The Board Revolt. Bloomberg Businessweek. April 19, 1992. Web.

The main issue in the case is the slow pace of change and decision-making instituted by General
Motors top management in order to address the companys poor performance. The tall
organizational structure of the firm exacerbated the situation as the hierarchy slowed down
communication process while increasing operating costs.
ASSUMPTION:
Shareholders have been pressuring the company for answers and results.
GMs top management has been advised that if they do not take action, the firm will be
vulnerable to lawsuits from shareholders due to misfeasance or nonfeasance.