ONE Saturday last February, a bunch of high-powered General Motors executives, board members and their spouses divided into teams and spent the next few hours building cars out of plastic pipe and glue. Then, with teammates pushing or pulling, they took turns driving their handiwork around a racetrack in the Arizona desert. At stake were prizes for the fastest and best-looking vehicles. When one car fell apart after 30 yards, what little was left of their executive dignity dissolved in a burst of snickers, hoots and guffaws.
Some contestants thought this whole exercise, designed to encourage the directors to know G.M. managers and become more familiar with the company, a bit silly. But their presence in the desert that day says a lot about the power of the nonexecutive chairman of the board, John G. Smale, at America's largest company.
In November 1992, reeling from $7.5 billion worth of red ink, G.M.'s long-somnolent directors staged a coup and took the unusual step of splitting the car maker's top job in two. Mr. Smale, the former chairman and C.E.O. of Procter & Gamble, was named chairman; John F. Smith Jr., a lifetime G.M. employee, became chief executive.
The board, which many shareholders and Wall Streeters felt had idled while the company ran itself into the ground, believed that the new management structure could speed G.M.'s recovery. While Mr. Smith would run the company day to day, Mr. Smale would make sure that the board held Mr. Smith and his top executives to account.
It will, of course, take more than a couple of years to see just how this experiment in governance plays out in Detroit. G.M.'s performance has improved, but the car market's rebound and a host of management initiatives have so far played a bigger role than the newly watchful board.
Still, as the Arizona retreat suggested, much has changed, according to interviews with Mr. Smith, other G.M. officials and knowledgeable outsiders. Where once management kept the board in the dark about the workings of the company, now there is a free exchange of information. Where once management acted and the board sat silently by, now it regularly challenges executives on issues like quality and labor relations.
What's more, Mr. Smith and others suggest that Mr. Smale has been far more involved in the company's affairs than is generally acknowledged. He has in fact assumed a remedial role that goes far beyond the typical chairman's chores. Drawing on his long experience at Procter & Gamble, which is considered to be one of America's best-managed companies, Mr. Smale is pushing G.M. to modernize its approach to marketing, management and production.
And despite initial concern in many quarters that a strong figure like Mr. Smale could not coexist with Mr. Smith, an uncommonly cooperative dynamic of influence and responsibility -- at least for the business world -- seems to have developed between the two men.
"John has taught us a lot in areas we were not up to speed on," said Mr. Smith, in his first interview about G.M.'s experience with an outside chairman. "He'd have questions about things, and it got us thinking that we were missing opportunities here."
Within the corporate community, this relationship has engendered great interest, as well as considerable debate.
At a time of growing concern about corporations' accountability to the people who own their stock, many shareholders and experts in corporate governance believe that Mr. Smale has a chance to define a job that should be much more common. The existence of a separate chairman, drawn from outside a company's executive ranks, and the measure of accountability it adds, they maintain, will over the long term improve American competitiveness in the world marketplace. At the least, they reason, it should prompt boards to take faster action when a chief executive or a corporate plan isn't measuring up.
Indeed, a host of companies split their top jobs in G.M.'s wake, including American Express, T.W.A., Kmart and Morrison Knudsen.
But most bosses, fearing interference and a loss of power, hate the idea. I.B.M.'s Louis V. Gerstner Jr. and Allied Signal's Lawrence A. Bossidy are among many who have insisted on having both the chairman and C.E.O. titles before taking top jobs. Others, if they countenance the split at all, tend to view it as a temporary condition for companies in trouble. American Express and Kmart, for example, quickly reunited the two posts.
AT General Motors, there is no doubt that Mr. Smith's attempts to remake the company are being aided by a transformed board. Led by Mr. Smale and salted with a few new members, a panel that was long seen as a rubber-stamp for management decisions, has become one of the most independent.
"This board compared to the pre-'92 board, well, there's no comparison," said Maryann N. Keller, an auto analyst Furman, Selz. "As opposed to other companies, this board is very much more involved, and it's very knowledgeable about the car business."
The verdict inside G.M. is the same. "The board is more useful now. It has changed the way the board works, the atmosphere in the room," said Mr. Smith. But he is unsure about its general application. "It's working well for us. I don't know if it would apply everywhere."
Mr. Smale has no such doubts. Although he declined requests for an on-the-record interview, he recently voiced unequivocal support for the separate chairman concept. Speaking in May at the Wharton School/ SpencerStuart Directors' Institute, he said it is "very difficult to logically defend any other format."
The concept's value stems from a practice common to all boards: The chairman determines the board's agenda. When the chairman is also chief executive, he can easily avoid discussion of unpleasant issues.
Having an outsider as chairman "allows directors to decide what they want to look at, and to demand what they want to see in terms of performance," said Mr. Smith, who is known as Jack. "It sets the priorities of the organization. It makes us get the attention of people right down to the plant floor."
Here's one example: Mr. Smale has made monitoring the quality of G.M.'s cars a board priority. According to Harry J. Pearce, an executive vice president and an inside director, "quality was often on the board agenda before, but it was selective. When it was a good report, we had it. But we didn't hear bad news."
Now, quality is always the board's first item of business. And, Mr. Pearce continued, "we don't tell directors what quality is. We tell them what's available" -- both internal and independent measures, like reports from J.D. Power -- "and they tell me what they want."
TO some extent, the withholding of information from the G.M. board by previous management is what got the car maker into such deep trouble in the first place.
Through the 1980's and early 1990's, G.M. kept spiraling down -- losing market share, racking up multibillion-dollar losses, closing plants, cutting jobs and eventually floating new stock to help cover operating costs. But the board did nothing, and G.M.'s then-chairman and C.E.O., Roger B. Smith, liked it that way. He gave directors as little information as possible, several have complained privately. And he lacked a basic understanding of the workings of the huge corporation.
"No one knew if they were making any money," said one outside director, who insisted on anonymity. "You'd ask, 'What's our profit versus Ford's,' and nine months later you'd get an answer back. They didn't want to tell the board, and they didn't spend any time looking at things that way either."
Some directors heaved a sigh of relief when Roger Smith retired in 1990 and was succeeded by Robert C. Stempel. He at least did not withhold data. Trouble was, G.M. was so badly organized that he could not pinpoint all of its problems, either. And he was moving too slowly to fix those he did know about.
G.M.'s embarrassed directors finally sprang to life after Mr. Smale reported back from a board-ordered mission to gather information from about two dozen top executives around the company. Directors mounted a two-step coup during 1992, eventually ousting Mr. Stempel and elevating Mr. Smale and Jack Smith.
Mr. Smith, who had proven his mettle turning around the company's European operations, seemed to be just the kind of hands-on, no-nonsense guy a management consultant would order.
Not everyone was so sure about Mr. Smale. For one thing, some executives thought he was an unlikely candidate for a job that might involve the spotlight. Quiet, modest to a fault, he had rarely met with the press or with securities analysts during all his years at P.& G., despite his sterling record there. It came as no surprise that his favorite pastime -- fishing -- was solitary.
What is more, Mr. Smale had sat through 10 years of G.M. board meetings -- sometimes seething at the way Roger Smith acted, he later told the friend -- without much protest. It took G.M.'s slide, and his own investigation of the company, to awaken his interest in corporate governance.
But most important, company insiders and outsiders alike wondered if Mr. Smale would interfere with management. Any sign that authority at G.M.'s top was confused could make a turnaround even tougher.
By all accounts, that has not happened. Instead, by freeing Mr. Smith from having to take care of the board, Mr. Smale clearly lightened the C.E.O.'s load.
Since Mr. Smale set about remodeling G.M.'s board, he has changed just nearly everything about it, including where it meets. For years, directors had met in New York City, a legacy of the days when the company's bosses, including the legendary Alfred P. Sloan, ruled operations from afar.
For reasons both symbolic and practical, Mr. Smale moved the meetings to G.M.'s Technical Center, just outside Detroit. First, that signals to employees that directors no longer are distant from the company. And, after morning meetings, directors now sometimes trek across the Tech Center campus to learn more about what is going on in its research and development facilities. They also visit other G.M. facilities much more frequently.
And they now regularly receive, in addition to those quality reports and the overall financial statistics they used to get, health and safety data, market share numbers broken down by market segment, in-plant production numbers, profit information about each car line, and more data on the return rates on investments. In many cases, G.M. had to upgrade its information systems just to supply the answers to directors' queries.
Significantly, these information categories are often measured against results of competitors as well as against corporate goals and projections. And directors get the data, usually in two-inch-thick packets, well before board meetings.
"John didn't want show-and-tell presentations," said Mr. Pearce. "He wanted substantive debate on tough, core issues. And John insists that the most knowledgeable person is there to respond, so different people are making appearances in the board room now. So we can't gloss over questions."
The result, by several accounts, has been some very candid exchanges. One example, according to Mr. Pearce: Paul O'Neil, a board member who is chief executive of Alcoa, "is absolutely uninhibited in challenging numbers and our analytical approach -- that didn't happen in the past. The signals suggested that it was unseemly behavior to ask questions or to delve into details."
IN between board meetings, Mr. Smale -- who, by his own account, spends 60 to 70 percent of his working day on G.M. business, generally from an office he keeps at Procter & Gamble's Cincinnati headquarters -- keeps digging.
Often, he is out visiting G.M. managers and facilities. "John has free rein to talk with anyone," said Mr. Smith. "The more he understands about the business, the more he can help. I don't object if he wants to talk to anyone or make a speech or, particularly, to go see an operation. The way it works is he will tell me what he's got planned, and sometimes I tell him I'd like him to take a look at an operation."
Sometimes, G.M.'s managers want to run something by Mr. Smale before making a decision. Then, "they generally send me a note telling me the reason," Mr. Smith added. And after Mr. Smith or his management team makes a decision, "someone will cover John. We want to make sure he's the first to know, and often he will want something sent to the board."
Mr. Smith confers often with Mr. Smale, too. "We probably talk three or four times a week, though some weeks, not at all," he said. "He'll call me or I'll call him if anything comes up, if there's a surprise." It's a rare day when Mr. Smith does not know where Mr. Smale is, and vice versa.
OUTSIDERS have noticed Mr. Smale's fingerprints on G.M.'s recent decisions to spiff up the company's marketing efforts. Despite internal complaints, the company broke with tradition and hired an outsider as marketing chief. And sometime soon, G.M. will create a new job -- brand manager -- with the responsibility of sharpening the identity and image of each car line. Brand management is a staple of consumer marketing companies like P.& G.
He is also active in promoting the concept of lean production -- striving for the most efficient operations -- at the company's production plants, at Mr. Smith's invitation.
And he has introduced a slew of basic practices that G.M., ludicrously, long went without. For one, there's the breaking down of G.M.'s North American operations into small business units, each reporting its own profit and loss and each with a person responsible for those results. And there's the development of a long-term strategy, a corporate vision, and a mission statement.
"He forced us to think about long-term vision and strategy," said Mr. Smith. "He pushed to make it an agenda item for the board, and as a result we did a long-term think of where we've been and where we want to go."
LATELY, Mr. Smale has been working with Mr. Smith on a list of priorities, an exercise designed to make sure that Mr. Smith and the G.M. board have the same agenda.
"This is the first time we put this on paper, for board review," Mr. Smith said. And although the list contains few surprises -- items include globalization, product improvement and total customer service -- the agreement forces accountability.
With it, said Mr. Smith, "I can talk to the board about my priorities, and ask how did I do."
Such intense scrutiny would annoy some chief executives. By all accounts, though, Mr. Smith is not one of them. "It requires a suppression of ego," said Mr. Pearce. He said that Mr. Smale understood, and made clear, from day one that he wasn't managing the company. "And Jack didn't feel he needed the additional title to know he was in charge. He has a lot of self-confidence."
Edmund T. Pratt, a veteran G.M. director and former chief executive of Pfizer, concurs. "I've not heard any criticism by Jack of John, or vice versa. I'm sure they've had differences of opinion, but no major ones. In fact, I can't even think of any minor ones," he said.
In any case, it would be hard for Mr. Smith to rebuff someone who brings so much expertise to G.M., yet does not try to hog credit. "He's driven by what's best for G.M.," Mr. Pearce said, "and that takes all the politics out of the meetings."
Well, maybe not all the politics. One Wall Street analyst, who insisted on remaining anonymous, said that some directors were miffed a few months ago when they heard in board meetings of items like mid-level appointments that they would have preferred to have learned beforehand.
The board does seem happy with Mr. Smale's performance. G.M.'s outside directors have met with Mr. Smith, but without Mr. Smale present, to rate the chairman's performance. "We asked Jack if it's working all right, or if there are problems, because it's one of those things we want to keep our fingers on," Mr. Pratt said. "We think it's working right. In fact, we gave John more pay."
Even so, Mr. Smale could not convince the G.M. board to make the split a permanent one. Last year, in an effort to make the G.M. changes last beyond his tenure, Mr. Smale got the board to adopt a 28-point set of written governance guidelines. They grant directors access to the company's top managers, call for regular board meetings without the C.E.O. present, and delegate the job of finding new board members to current ones, among other things. But they left open the question of a separate chairman, providing instead for a lead director if the two jobs are reunited, partly because finding the two right people for the jobs is not easy.
To be sure, having the wrong person as chairman, a tough boss used to running his own show, for example, could make for trouble.
Right now, only about a fifth of all American companies have non-executive chairmen -- and many of those are independent in name only, because they are former C.E.O.'s or are otherwise related to current management. In an assessment of nearly 1,300 companies, the Investor Responsibility Research Center in Washington found that only 38 had "truly independent" separate chairs.
But at Wharton in May, Mr. Smale predicted that "over time" more companies would have a non-executive chairman. If he does his job well, Mr. Smale may just influence the outcome. #
John F. Smith, Jr. Born April 6, 1938 Worcester, Mass Joined GM in 1961 at Fisher Body plant in Framingham, Mass. Rose through the ranks and made his reputation turning around GM's European operations. Became chief executive and president of G.M. on Nov. 2, 1992.
John G. Smale Born Aug. 1, 1927 Listowel, Ontario, Canada Joined Procter and Gamble's toilet goods organization in 1952 Moved up ranks, becoming a vice president in 1967, chief executive in 1981 and chairman in 1986. Names chairman of the board of G.M. Nov. 2, 1992
Photos: John G. Smale, chairman of General Motors, believes other companies would benefit by following G.M.'s lead. John F. Smith Jr., the chief executive, likes G.M.'s power-sharing arrangement, but is unsure how it would work elsewhere. (Photos By Tim Shaffer/Associated Press)(pg. 11) Chart: "Sharing Power" General Motors is one of the relatively few companies that have split their top jobs between an outside chairman and a chief executive. Chart lists other prominent ones and their current status. (Sources: Investment Responsibility Research Center, Company reports)(pg. 11)