Widely remembered for his run at the Presidency in ‘92, in which he became the most successful independent candidate since Teddy Roosevelt, Perot was also an adroit businessman who built two billion-dollar companies from scratch.
Alphaville, however, remembers Perot not for his successes as an entrepreneur and presidential hopeful but for his short stint as a General Motors board member. Between 1984 and 1986, Perot left an indelible mark both on the company and on the business of institutional investing.
In the early 1980s, General Motors was in trouble. It was rapidly losing market share to Japanese rivals such as Honda and Toyota, who were able to manufacture cars that were not only cheaper, but better quality than their US competitors.
When GM’s chairman and chief executive Roger Smith, who had taken on the job in 1981, was looking for solutions, one answer came in the form of Electronic Data Systems (EDS), which Perot had founded in 1962. EDS had grown to become a leader in IT services for blue-chip businesses across the States, and Smith saw it as a key component in helping the ailing automaker transform into a modern manufacturer.
In 1984, General Motors paid $2.5bn for the business. Financed by $900m in cash, and the rest in stock, the deal made Perot GM’s largest shareholder, and he immediately began to work on turning the lumbering business around.
It was not a happy process. According to Jeff Gramm’s excellent history of shareholder activism Dear Chairman, Perot quickly realised that the company’s problems stemmed from a board who were unwilling to listen to their customers, employees or — in Perot’s case — agitated fellow board members.
While Smith blamed his workers for GM’s relative inefficiency, Perot suspected it was because the company’s culture was broken. Workers were thought of as an expense, rather than an asset.
His suspicions were proved right when in 1983 GM struck a deal with Toyota to reopen a plant in Fremont, California (now owned by Tesla Motors). Dubbed “NUMMI” — New United Motor Manufacturing Inc — the joint venture achieved defect rates and quality ratings unheard of at GM’s other plants. And, crucially, it did so with old equipment, proving to Perot that culture, not technology, drove performance. In Perot’s view, as expressed to the board in ‘85, its competitors were winning by “using brains and wit as a substitute for capital”.
Smith, however, didn’t buy it, and continued to see investments in technology as GM’s panacea. When GM agreed to buy Hughes Aircraft, a defence contractor, for $5bn in ‘85, Perot thought the business was repeating the same old mistakes and decided to write to Smith to share his frustrations.
Here are a few highlights from Dear Chairman. First, Perot addresses the acquisition:
Hughes is not generally considered by senior GM’ers to be a significant contributor in making GM quality and cost effective. Acquiring Hughes does not resolve the fundamental management issues that place GM at a competitive disadvantage.
Before questioning Smith’s behaviour at a recent board meeting:
For example, during the recent meeting in Detroit, you were: obviously bored, barely tolerated what others said [and] your attitude and comments stifled open communication . . . You need to understand that your style intimidates people . . .[and] . . . there is a widespread feeling throughout GM that you don’t care about people.
And then he lays out what he believed was GM’s fundamental problem:
. . . I do not believe that GM can become world class and cost competitive by throwing technology and money at problems. The Japanese are not beating us with technology or money. They used old equipment, and build better, less expensive cars by better management, both in Japan and with UAW workers [GM workers at NUMMI] in the US
Perot, however, does sign off on a reconciliatory note:
Roger, my goal is to successfully resolve these problems. I have tried to define them as a first step. This is not a personal issue between us. The issue is the success of GM. I am committed to doing my part to see that we win, and I know that you are, too.
To his dismay, Perot didn’t get the response he was hoping for and decided to vote against the acquisition at the ensuing board meeting. Whether he was right or not, Smith, and the GM board, had had enough of his posturing and decided to offer Perot, and three other EDS officials, $750m to sell their shares back to the company.
It was a ridiculous deal. GM’s shares were trading at $33, while Perot was being offered $61.90 per share to sell. Perot launched a blindside at General Motors in a press release. Via Dear Chairman, again:
At a time when General Motors is:
— closing 11 plants,
— putting over 30,000 people out of work
— cutting back on capital expenditures
— losing market share
— and having problems with profitability
I have just received $700m from General Motors in exchange for my Class E notes and stock. I cannot accept this money without giving the GM directors another chance to consider this decision . . . If the GM directors conclude that this transaction of December 1 isn’t in the best interests of GM and Class E shareholders, I will work with the GM directors to rescind this transaction.
In the end, however, the transaction went through, despite 20 per cent of GM’s shareholders opposing it at the company’s annual meeting in 1986.
Perot would go on to found another billion-dollar company, Perot Systems, before his presidential run. But his legacy at GM was lasting. After his very public exit from GM, Gramm writes that institutional shareholders began to take note of poor corporate governance in the US. As one example, in 1987, for the first time ever, four public pensions funds submitted shareholder resolutions— 47 of them to be precise — with CALPERS chief executive Dale Hanson admitting that, “as owners [of companies] for the last 30 or 40 years, we’ve been asleep at the switch”.
We’ll leave you with another zinger from Perot two years after the GM saga. From a 1988 Fortune interview:
At GM, if you see a snake, the first thing you do is go hire a consultant on snakes. Then you get a committee on snakes, and then you discuss it for a couple of years. The most likely course of action is — nothing. You figure, the snake hasn't bitten anybody yet, so you just let him crawl around on the factory floor. We need to build an environment where the first guy who sees the snake kills it.
It’s not hard to think of a few businesses now which would do well to heed his advice.
Ross Perot, businessman and politician, 1930-2019 — FT
Lasting lessons for smug CEOs and somnolent shareholders — FT
“Great quarter guys!” — FT Alphaville
The case for activist investors — Harvard Business Review
Dear Chairman — Jeff Gramm