Heroism in governance: a special tribute to John Smale.

• Author: Kristie, James
• Position: COVER STORY

General Motors board member John Smale personified the courageous director when he became nonexecutive chairman of the automaker, an act that staved off disaster for the company in the 1990s and led to an enduring advancement in how boards govern.

Former General Motors Chairman John Smale died in November 2011 at the age of 84. He was a longtime Procter & Gamble Co. executive, joining P&G in 1952 and rising through the ranks to become CEO in 1981 and adding the chairmanship in 1986. He joined the board of General Motors Corp, in 1982. Ten years later, in what was described in the press as a "boardroom coup," the GM directors ousted Chairman and CEO Robert Stempel, and Smale, then 65 years old, stepped up to the position of nonexecutive chairman, a relatively unfamiliar role in the corporate world at that time. Smale "grabbed GM by the throat and provided us with a game plan," then GM board members Ann McLaughlin Korologos and Bill Marriott write in the set of reflections that follow that review the decisive impact John Smale had on GM and on the evolution of corporate governance.

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John Smale set the model

Not only for good corporate governance practices that have had lasting widespread effect, but also for a style of leadership marked by character, integrity, and honesty.

BY IRA M.MILLSTEIN

There are very few truly great men steeped in tradition, who have been great enough to see the need for change and embrace it. John Smale was such a man. I came to know and appreciate John Smale late in his professional career when we spent time together starting in the General Motors turmoil of the 1980s. He was on the board and I was outside counsel to the company, and later to the board. John's outstanding career at Procter & Gamble Co., his service on distinguished boards, and his devotion to family, community and good works have been well-chronicled, so I'll speak only of the John I knew and worked with.

The GM board was then made up of some independent members, men and one woman, I thought of as the "establishment": top executives of major corporations, people distinguished in their own right. For them, and many others, serving on boards such as those at GM, IBM, AT&T, Pfizer, Citicorp, and the like was considered to be a mark of ultimate corporate recognition. The role of boards then was to support and rarely contest management, watch the "store," and be sure the disclosure was as accurate as the auditors suggested (but often didn't demand). People were chosen, generally, already known to be team players. Surely, nothing unusual in corporate America, and it worked successfully for a long while. American corporations were successful icons.

But change came, post-1950s, with the advent of increasing foreign competition as Europe and Asia found their footing after WWII. There followed a string of bad times, unhappy corporate incidents, and conglomerate acquisitions with little benefit to commend them other than the "deal." "Raiders" did more than be gadflies to management and shareholders, especially at corporations enmeshed in such acquisitions. Institutional shareholders began to find their voices. Some icons faltered, not sensing the changing climate.

Awareness of change came late to GM. It took a while for the board to realize that unswerving support of management could only lead to further losses and possible destruction. I spoke to members of the board, wondering who would be willing to stand up and say so, with management always present and controlling the agenda. One reliable old hand told me that when questions came up, heads in the boardroom invariably turned to John Smale for a first, or final, opinion. Natural selection seemed to point to him: he was the leader without campaigning or asking--he led simply by force of character, integrity and honesty.

And so when the situation at GM became severe, John was formally asked by the board to enquire further of top-level managers what they thought. And he did so, bringing back to the board a report that those who could be depended on for the company's future saw the need for change, not only in management but in attitude. And John led that change--at the beginning with his own quiet dignified style, but later doing what had to be done.

As the process of change developed, John led the board in setting a model for good corporate governance that has lasted until today. John and the board didn't consciously set out to create a "model" of corporate governance; they simply corrected their own governance process.

What was John's signal contribution which I believe changed boards forever? It was a board-created, self-imposed, voluntary mandated "meet alone"!

Independent directors agreeing to meet alone in a chosen regularity, where they could talk honestly amongst themselves, not under management's watchful eye, was considered by many in the "establishment" to be treason, totally contra to "good" corporate practice. But John had seen the need for this. The GM board had been inhibited to be critical under management's watchful eye, and delayed change far too long. The first "meet alone" among those independent directors, led by John, set in process the needed change for GM management, and later the rest of corporate A?Tierica. "Meet alone became common practice, and rightly so.

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It doesn't sound dramatic now, but at the time it took a John Smalc to risk criticism and see this basic change as the right thing to do, and then lead the others to have the courage to do it. I have been teaching corporate governance for some years, and in my classes I devote a section to ethics--also a disappearing course of study. One of my guest lecturers is David Miller, formerly of Yale Divinity, now at Princeton. He shared with me a definition of ethics, which I now use regularly. The role model for this definition has, for me, always been John: "Ethics is the art and discipline of discerning the right, the good and the fitting action to take and having the creativity and courage to do it."

Ira M. Millstein is a senior partner at the international law firm Weil, Gotshal & Manges LLP, where, in addition to practicing in the areas of government regulation and antitrust law, he has counseled numerous boards on issues of corporate governance. In addition to his active legal practice, Mr. Millstein is the senior associate dean for corporate governance and the Theodore Nierenberg Adjunct Professor of Corporate Governance at the Yale School of Management.

John Smale, hero and inspiration

He had the guts to do what was right, irrespective of the consequences.

BY ROGER KENNY

Today, lead directors and executive sessions of the board are taken for granted. But in 1992, when John Smale, behaving as a true lead director, took the unprecedented step of gathering the independent board members together for the first time ever at General Motors Co., governance had finally reached a decisive moment. His action, supported by his fellow directors, led not only to the recovery of a great American institution but set a higher standard across the board for governance.

By adopting and communicating its now famous set of guidelines and utilizing a leadership structure--separating the roles of chairman and CEO--that was strongly resisted in this country, General Motors provided the impetus for a new relationship between management and the board. GM became a beacon for a new era. And the nonexecutive chair for the board became a reality.

I spoke about John with Tom Wyman, former chair and CEO of the CBS network and John's fellow director at General Motors. Tom (who died in 2003) said, "John approached me and asked 'Torn, do you feel the same way I do about where this company is going?' When I responded yes, John replied, 'Let's get all the independent directors together.5" They met at a hotel and discussed GM's circumstances. The decision that came out of that meeting was that the CEO, Robert Stempel, had to go--a decision that was heretofore unheard of at General Motors with its long history of selecting their CEOs from within the corporation, the very essence of their culture. (IBM was to follow GM/s decision on a forced change in leadership the following year.) The other decision to come out of this meeting was to adopt what became the GM Board Guidelines on Significant Corporate Governance Issues

By this act, the GM culture took a major shock, but so did corporate America. The GM Guidelines codified the accepted governance principles of corporate America, most of which we now abide by (even preceding by almost 10 years the advent of Sarbanes-Oxley). John Smale and the other directors on the GM board are the heroes of our modern corporate governance system. They had the guts to do what was right irrespective of the consequences. They are an inspiration to today's boards of directors.

In 2003, when I was president of the firm Boardroom Consultants, we honored John Smale with our "Most Outstanding Director Award." On that occasion he shared "how very difficult it is for an independent board member to bring any kind of penetrating judgment to the operation of a corporation ... outside of the context that management provides." All the more reason to have an independent nonexecutive chair position to help the board do its job of leading the corporation and insuring its success.

Two years ago, after the General Motors bankruptcy, TARP, and the imposition of federal government control, John said to me when I caught up with him in the Florida Keys, "Looking back, it would have been so much better if the three of us [GM, Ford and Chrysler] could have gotten together and done realistic compromising with the unions ... for everybody's sake, just as they did in Europe. Unfortunately, our cultures and companies are so competitive and different, we couldn't pull it off. The...