Peering into a crystal ball, it’s hard to know what General Motors Corp. would look like today if one of the biggest boardroom disputes to play out in the public’s eye had never happened.
The GM boardroom fight – over a potential alliance with Nissan and Renault three years ago – led GM stakeholder and billionaire Kirk Kerkorian to cash in his chips and sell off his 9.9 percent ownership in the auto giant that same year.
Investor confidence in the financially troubled GM plummeted after Kerkorian’s minion and turnaround specialist Jerome York delivered a blistering critique as he quit GM’s board after only eight months.
Georgia State University’s Mark Chen, associate professor of finance in the J. Mack Robinson College of Business, has hand collected data from public filings from 181 boardroom disputes in 168 public companies in the U.S. over a 10-year period.
“Companies that reported director disputes faced crises more often,” said Chen, who is a co-author of the study along with Anup Agrawal of the University of Alabama.
“They fell into bankruptcy or the stock became delisted. The results showed these companies were acquired more often,” Chen said.
In GM’s case, the automaker lost $1 billion in market value in the stock selling that followed Jerome York’s departure. His resignation letter said he quit because, “I have not found an environment in the board room that is very receptive to probing much beyond the materials provided by management,” according to the Securities and Exchange Commission filing.
And in years to follow, the company never regained its financial footing as the economic woes began mounting and eventually toppled GM, forcing the White House to request an ouster of its chief executive when it requested a government bailout.
By the time GM emerged from bankruptcy protection, the new company – largely government owned – had shed 20,000 U.S. jobs, 2,400 dealerships, 14 plants and three brand names.
Chen looked at disputes resulting in one or more director departures and he investigated how those boardroom brawls have ultimately affected big Fortune 500 corporations.
Besides GM – which was the worst case scenario – he looked at boardroom fights at Wal-Mart, Cigna Corp., Compass Bancshares, Janus Capital Group, Smith & Wesson Holding Corp., and others.
The report showed that board disputes were related to substantial rifts between the views of the directors and management regarding board functioning, agency problems, firm strategy or specific corporate control or financing transactions.
“Conflicts in the boardroom appear to be the result of power struggles between management and the directors,” Chen said. “Directors with shorter tenures and directors who are entrepreneurs, venture capitalists, or investment bankers are more likely to be involved in a dispute. But directors who are top executives of other companies are less likely to be engaged in a dispute, as are outsiders with greater stock ownership in the firm.”
Of the 181 disputes, the report found that 13 of them were second occurrences that happened after a company experienced an earlier director resignation due to a dispute. In 18 occurrences, two directors departed, according to the data.
Additionally, in the days surrounding disclosures of disagreements in the board room, the affected company’s stock declined slightly more than 6 percentage points, net of total market return.
“The occurrence of these disputes is not completely random,” Chen said. “They’re related to measurable aspects of corporate governance, including CEO power, board and ownership structure.”
He added, “it is usually hard to see in the black box – or crystal ball – but this study exploits a Securities and Exchange Commission rule that requires corporate disclosure of internal disputes.”