Kerkorian: Down the curve

Detroit, Oct. 8: Will Kirk Kerkorian go away mad — or will he be back'

Everyone in Detroit is waiting for the answer after a tumultuous Friday in which Kerkorian’s close associate Jerome B. York stepped down from the General Motors board, firing off a letter sharply critical of the company’s management. At the same time, Kerkorian said he was no longer interested in increasing his stake in GM, where he is the largest shareholder, with about 9.9 per cent.

The moves, to which GM responded with a defence of its turnaround strategy, sent the company’s shares sharply lower, deepening Kerkorian’s own losses on the investment he began acquiring nearly 18 months ago. GM shares fell $2.08, or 6.2 per cent, to $31.05. As a result, Kerkorian lost more than $100 million on his 56 million shares.

The moves came two days after talks collapsed among General Motors, Renault and Nissan over a global alliance — talks that Kerkorian instigated and pushed GM’s management into pursuing — which they did, albeit reluctantly.

What next'

Analysts said there were two likely possibilities for what Kerkorian might do next: he could sell his shares and be done with the company altogether, or he could start a proxy battle to unseat some GM directors and install his own slate.

Such a battle, which would echo similar actions by dissident shareholders at the HJ Heinz Company, Hewlett-Packard and Time Warner, presumably could increase pressure on GM’s chief executive, Rick Wagoner, beyond what Kerkorian has already applied. Either way, York’s resignation means Kerkorian is “throwing in the towel” on trying to effect change in GM from the inside, said Michael Useem, a professor of management at the Wharton School at the University of Pennsylvania.

Each option has its downside. The first would cause Kerkorian to lose both face and money; the second one would be difficult without the support of other major shareholders, none of whom has yet joined Kerkorian and York in publicly criticising Wagoner.

Tough tussle

York laid out a series of steps he wanted GM to take in a speech last January, one month before joining the board, where he served on the public policy and investment funds committee. Wagoner, who at the time said GM was pleased to welcome York on its board, followed some of those suggestions, like halving the GM dividend and initiating salary cuts for a handful of top managers. But he resisted other steps, like York’s suggestion that GM dump some of its underperforming brands. In March, GM’s board issued a statement in support of Wagoner after reports that suggested his job was in jeopardy and that York would be a candidate to succeed him as chairman.

Bitter letter

York, in his resignation letter, said he reached the conclusion that the company’s other directors were not willing to challenge executives on the company’s strategies. In the letter sent to GM’s lead outside director, George Fisher, York said the company was being too timid in confronting its problems. Although he acknowledged that GM did not face any threat of a near-term bankruptcy filing, “I have grave reservations concerning the ability of the company’s current business model to successfully compete in the marketplace with those of the Asian producers,” York wrote.

Odd man out

York always faced the risk of being the board’s odd man out. Early on in his tenure as a GM board member, management experts suggested he would probably be isolated, given that every other GM director was chosen while Wagoner was chief executive or a top company manager.

In fact, York’s comments echoed those of another dissident GM board member, H. Ross Perot, who parted ways with the company nearly two decades ago after a brief but bitter stint on the board. In 1988, Perot, who became a GM director after the automaker bought his Electronic Data Services, ridiculed other board members as “pet rocks” to the chief executive at the time, Roger B. Smith.

Wagoner plans

As long as GM can damp any shareholder dissent, Kerkorian’s effort “is going to go nowhere if investors believe that Rick Wagoner does have a turnaround strategy,” Michael Useem said. If Kerkorian does indeed have a plan of attack, York’s letter, which was sent privately to Fisher but made public almost immediately, could be part of a strategic effort to shake shareholders’ confidence that the board was working in their interests.

GM’s statement did not directly comment on York’s resignation, but it said the decision to end talks with Nissan and Renault was approved by all 12 board members, which would include York, and it pointed out that 11 board members are not company executives.