Wednesday, June 3, 2009

General Motors

What a mess this country is in! General Motors, that great icon of American industry, has just filed for bankruptcy. For much of the twentieth century GM has provided the corporate standard around the world. How did such a business model come to the point of failure? Why did its highly compensated management team allow such a situation to develop?

Several factors are responsible for the collapse of the manufacturing titan, General Motors. The world-wide recession has taken its toll on all American businesses. An outdated contract with its labor force, which contains an unsustainably rich benefit package, played a part in its downfall. However, from my perspective, it is the structure of corporate management that is most at fault for hard times in corporate America.

The American management model gives an inordinate amount of authority to the top tier of managers with very little in the way of accountability. Even if they are fired for mismanagement, corporate CEO’s get large severance packages. There is little incentive for them to do well. Top management has an unhealthy influence on the corporate board and essentially sets their own compensation package. Further, incentives are based on short term successes rather than long term growth in the company. Thus deals that reap quick profits are preferred in place of performance over the long haul. All these, along with other factors, conspire to condemn American business to fail when economic hard times come.

Hopefully, the company that emerges from bankruptcy will have learned a lesson from the current experience. The future of manufacturing in America depends on it doing so.

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