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The Lesson of GM

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The news that the Obama administration is insisting that General Motors Chair Rick Wagoner step down as one of the conditions for continued federal support comes as no surprise. But there is a danger that everyone will miss the real lesson. What happened to GM is the poster child for what really created the economic crisis -- short time horizons. GM, Ford, and Chrysler all actually knew (and admitted in private conversations with the UAW) that their business model -- high-margin, low-fuel-efficiency SUVs built on outmoded technology platforms -- wasn't sustainable. But every year they told themselves that, while they had only a decade to catch up technologically with Japan and Europe, they could do the job in ten years. And every year, they gave themselves another year to begin.

This morning's New York Times calls Wagoner a "steady optimist", but the flaw here wasn't Wagoner's personal temperament -- it's an American business culture that has taught that short-term shareholder value, not long-term product leadership, is the test of management. The Big Three have been just as short-term focused as the banks, even though they're in a business where it takes years to bring new models to markets -- not the months in which an investment bank can change strategy and unload its positions.  It was the ability of Toyota and Honda to think ahead that enabled them to take so much market share away from the Big Three prior to this economic crisis -- so that the American manufacturers were already in deep financial trouble, even in good times.

And there is a very real danger that as we move from recovery to reform we will overemphasize the role of oversight and regulation, when what we really need to do is restructure corporate governance to change the incentives and time horizons of management. Any reform agenda needs to answer this question: "With this set of rules, will management be encouraged to think ten to twenty years out instead of obsessing about next quarter's earnings?"

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