One way to judge General Motors Corp.'s everyday commitment to good governance standards is by a handbook distributed to all salaried employees called Winning with Integrity. A 21-page set of ethical guidelines ranging from how to report wrongdoing to conflict of interest rules and insider trading issues, Winning with Integrity lays out a clear message that all employees share the responsibility for maintaining the company's legacy. Each year, employees must affirm they have read its provisions and will comply with them. "In the end, it comes down to personal responsibility–mine, yours, all of ours," reads an introduction by Chairman and CEO G. Richard Wagoner Jr. The document has been required reading at GM since 1996, long before Enron Corp.'s collapse or Sarbanes-Oxley's rise. "The most fundamental thing to have in place is tone at the top," says Paul Schmidt, GM's controller, who heads the automaker's compliance efforts. "It is very important that the organization understand that the top management follows this."
There are many companies that adhere to a long list of best practices in corporate governance, but few have been at it as long as GM. In 1994, the automaker adopted a clear and influential set of board governance guidelines, and it has been modifying and developing its approach ever since. For the consistency of its message and longstanding commitment, Treasury & Risk Management is recognizing GM with its first annual award for excellence in corporate governance. "GM has one of the longest track records," says Gavin Anderson, CEO of corporate governance ratings service GovernanceMetrics International, which recently rated GM a '10′ for global governance standards–its highest rating and one given to just 26 companies worldwide. "Their adoption of corporate governance rules essentially became a model for governance by large companies."
General Motors put in place its board nominating committee in 1972, and its executive compensation committee dates back to the 1930s. But it was the changes in 1994 that set the stage for GM's modern era of governance excellence. Those changes followed one of the automaker's darkest periods, when years of declining sales and earnings led the board to oust then Chairman and CEO Robert Stempel and replace other executives.
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The 1994 document clarified the role of the board, how directors were selected, their authority and how they were evaluated. The board had already been following some of those guidelines, such as requiring that a significant majority of directors be independent and having those independent directors hold meetings without management. At the time, all but three of GM's 13-member board came from the outside, rather than from company management ranks.
Today's 11-member board includes just a single member of GM management, CEO Wagoner, and three of its members are active CEOs at other companies. The company has also won praise in recent years for eliminating its dual-class stock voting structure, which was a remnant of its acquisition of Electronic Data Systems Corp. and Hughes Electronics Corp. in the 1980s. In January 2003, GM began expensing all employee stock option grants. The GM board also severed all contacts with Deloitte Consulting after its parent and GM's main auditor, Deloitte & Touche LLP, decided not to spin off the consulting arm. Perhaps most famously, when faced with a $19 billion funding gap in its pension plan, GM issued the largest debt offering in history last year and used the proceeds to move to a fully funded status as of its most recent fiscal year close. The board's audit committee, headed by retired Ernst & Young LLP Chairman and CEO Philip Laskawy, met seven times in 2003, as did its directors and corporate governance committee, headed by retired Eastman Kodak Co. Chairman and CEO George Fisher. The audit committee also meets privately with the general auditor, the internal auditor and general counsel without other management present. "The integrity of your company and your people is absolutely essential, but you can't take it for granted," says John Devine, GM's vice chairman and CFO. "You have to work it every day and never take your eye off the ball."
On the other hand, GM has not shied away from taking controversial stands. For instance, the company has come out against the current proposals for greater shareholder proxy access, and while there has been growing support for severing the positions of CEO and chairman among governance advocates, Wagoner has served in the dual roles since May 2003. "Our governance guidelines say the board is free to make a choice, and now they think it is best for Rick to serve as both CEO and chairman," says Gregory Lau, executive director of global compensation and corporate governance. "It lends speed to decision making and accountability." Lau also argues that the expanded role of GM's presiding director, who must be the same independent director who chairs the GM board's directors and corporate governance committee, acts as an effective check against a potentially domineering CEO and chairman.
ADJUSTING THE GEARS
As for 2002′s Sarbanes-Oxley Act, CFO Devine praises the law and separate New York Stock Exchange regulations for helping to restore investor confidence. Although GM supports the increased regulation, he notes that, in practice, they have created difficulties. "As time goes on and the rulemaking becomes better understood, some areas of the law are creating unnecessary and costly burdens on business that do not help to bring clarity to a company's performance," Devine says. For instance, Controller Schmidt calls it "counterproductive" for regulators to require shorter filing times for 10-K and 10-Q reports at the same time that the auditing process has been made more thorough with Section 404 internal control requirements. Some rules issued by the Financial Accounting Standards Board are also too ambiguous, Schmidt adds, especially when they hit on competitively sensitive information. The GM controller does not call for a rollback, but a pause in the regulatory action to let companies catch up. "Let's see how 404 plays out," Schmidt suggests.
GM has made some procedural adjustments since the passage of Sarbanes-Oxley. To help with the quarterly Section 302 certifications required from Wagoner and Devine, the company has formalized a process in which more than two dozen operating unit executives around the world file their own sub-certifications first. Along with tone at the top, Schmidt sees the handling of control policies as most crucial for good governance efforts. "It is very important that overall operating and internal controls be the responsibility of the operating management, not financial management," he notes. It is again the requirement that excellence run throughout the organization that makes GM a standout and a governance leader.
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