Gubernatorial candidate Kristin Davis with a supporter Photo credit: Sara Dover, NBC Niteside

Political parties love to party. And no party parties like the Anti-Prohibition Party, whose candidate for governor was the former “Manhattan Madam” who claimed Eliot Spitzer as a client.

The neophyte candidate, 35-year-old Kristin Davis, garnered only about 22,000 votes Tuesday—less than half the 50,000 needed for the party to remain on statewide ballots for the next four years. Still, Ms. Davis celebrated her foray into the rough-and-tumble world of New York politics at an election night party with her coterie of eccentric supporters—a drug dealer’s son, an actress in pornographic videos, a reality TV star.

“It’s the hottest soon to be governor!” said one supporter, a partner at a white-shoe law firm in New York.

Ms. Davis campaigned on a platform to legalize prostitution and marijuana and to enact gay marriage legislation. She launched her bid at the behest of political operative Roger Stone, a longtime foe of Mr. Spitzer who once claimed to be the FBI source who discovered from a prostitute he met at a bar that Mr. Spitzer wore his socks in the sack.

She’s paid her dues to society but she said she was a political scapegoat in a system that gives politicians special treatment.

“Politicians” she said. “They’re all corrupt.”

Mr. Stone, whose political thuggery is immortalized with a tattoo on his back of Richard Nixon, became Ms. Davis’ political strategist and guiding force. He mingled with supporters at the bar of the Taj lounge in the Flatiron district, sipping a vodka martini. Pedro Escobar Jr., the son of a notorious Colombian drug lord, stood near the door. Mr. Escobar, who has the word “Real” tattooed on his head, said he supported the “weed thing” and then talked up his efforts to commercialize the Escobar family name through a clothing line, cigars and a reality TV show.

Vinny Parco, a private investigator who had his own reality TV show on Court TV called Parco P.I., voted for Ms. Davis–“What the hell,” he said, “why not? I like her platform.” He came to the bar to show his support. A porn star, Brittany Andrews, apologized for coming late to the party. She had gone on a date—a failure, she explained—earlier in the evening.

Of course, the Anti-Prohibition Party election night party was not the only scene in town. The Green Party gathered at a sedate pub near Union Square. And the Democrats and Republicans commandeered the ballrooms at the Sheraton and Hilton hotels a block a part in midtown.

But Ms. Davis’s party, if not her candidacy, was certainly more unusual. Ms. Davis’ eyes perked up as her running mate, 49 year-old Tanya Gendelman, a Russian émigré and lawyer from Brighton Beach, sidled over to greet her. The first all-female gubernatorial ticket in New York history shared a hug.

A friend and publicist from Penthouse magazine, who helped Ms. Davis write her memoir, The Manhattan Madam, said the magazine had helped the campaign raise several thousand dollars auctioning dinner with a Penthouse “pet” at the Penthouse Executive Club on the west side of Manhattan.

“Penthouse is all about freedom,” said Lainie Speiser. “We don’t believe prostitution, marijuana or gay marriage is going to hurt anyone.”

Mr. Stone, who got his start in politics as a kid working on Barry Goldwater’s 1964 presidential campaign, said he was getting too old for campaigns. Wearing a pin-striped wool suit, he wiped the sweat from his tanned brow. Mr. Stone supported Carl Paladino, whose campaign manager, Michael Caputo, was a Stone protégé. But Ms. Davis’ campaign captured his libertarian leanings. Her notoriety, he said, made it possible.

“If she were a school teacher,” he said. “Nobody would be here tonight.”

——-30——-

Special thanks to reporter Sara Dover of NBC Niteside for use of  her photograph.

By Jeremy Smerd

Published: September 3, 2010 – 11:54 am

In a meeting with automakers in January, the Bloomberg administration pitched an ambitious idea to reinvent one of the city’s most ubiquitous symbols: the taxi. Read more.

By Jeremy Smerd

Published: June 13, 2010 – 5:59 am

“Kudos to Jeremy Smerd, a health care reporter for the business publication Workforce Magazine, for an illuminating piece about a little-mentioned consequence of the Massachusetts reform law. Smerd’s piece stands out from most of today’s health care reportage for several reasons: it’s long enough (but not too long) for the reader to get the gist of the problem he addresses; it discusses something the law’s cheerleaders and the media outlets that follow them are not eager to discuss; and it does so using an anecdote that’s neither predictable nor trite.”

Read the rest of her post here.

oon after Massachusetts state legislators passed a law in 2006 requiring full-time workers to buy health coverage from employers that offered it, Mirlene Desrosiers, a home health care worker, traded the state health insurance she could afford for an employer plan she could not.

     Because her weekly gross income was a mere $500, she could have dropped insurance altogether and been exempt from paying a penalty. But with two small children and a physically demanding job that regularly entails lifting elderly patients, she felt that going without health coverage would have been irresponsible.

     To pay her health insurance premium of $287 a week, she upped her hours, often working more than 120 hours a week at four different health care companies. She says she lives to work and works to pay for health insurance.

     “Either way it’s a no-win situation. If you have insurance, you have to pay your life for it,” says Desrosiers, who is 41 and moved to the U.S. from Haiti 23 years ago. “If you don’t have it you still have to pay. So you might as well have it.”

     Health care reform in Massachusetts was supposed to help those least likely to be able to afford health insurance. But that has not been the case for some low-wage workers, particularly home health care aides. While Desrosiers’ working life may seem extreme, owners of agencies say runaway health care costs mean that low-wage workers are purchasing insurance that is increasingly unaffordable.

     “Most of our employee base does not want health insurance because they are living check to check, week to week,” says Mike Trigilio, president of Associated Home Care and Desrosiers’ employer. “They are barely able to muster enough money together for rent or food, let alone health insurance. In the past, a lot of employees would go without it. Now they are forced to take it, and it puts a strain on them and on our company.”

     National health care reform efforts could have significantly improved the lives of low-wage workers like Desrosiers through generous federal subsidies that would help them pay for health coverage. But since the election of Massachusetts Republican Sen. Scott Brown in January to fill the seat vacated by the late Democratic Sen. Edward Kennedy, the passage of the Democrats’ health care plan appears unlikely.

     If reforms do pass, they may include changes in insurance laws, including a requirement that all Americans purchase coverage without the subsidies to help them do so. If that happens, the federal government may do to low-wage workers across the country what Massachusetts did in 2006.

     To this already complex situation, add an underlying and persistent threat to businesses and workers alike: growing health care costs. As the current impasse over federal health reform demonstrates, it’s easier for legislators—whether in D.C. or in Massachusetts–to extend coverage than to bring down costs.

     “We were hoping there would be meaningful cost containment in federal legislation, but there doesn’t seem to be anything there,” says Rick Lord, president and chief executive of Associated Industries of Massachusetts, a business association. “That’s a huge challenge we face if we want to sustain this reform law.”

The lesson of Massachusetts
    Lord knows the situation well. As a board member of the Commonwealth Connector, the organization created by Massachusetts to help residents purchase insurance, Lord has seen that expanding coverage in the state has been relatively simple. Massachusetts requires that individuals carry health insurance and makes most employers offer it. Today just 2.6 percent of the state’s residents are uninsured—the lowest percentage in the country.

     But bringing down health care costs has been a much more complex and elusive goal.

     “Reform’s been very costly to companies like us,” says Jonathan Morin, comptroller for Intercity Home Care in Salem, Massachusetts. “We’re getting no rate relief. We’ve incurred additional costs for our staff. In the end the workers pay for it.”

     Much is made of the fact that an employer requirement in Massachusetts has increased the number of people who receive health insurance through work. Employers had predicted, as they do today, that any requirement to provide insurance harms an employer’s ability to tailor the scope and cost of health benefits to the needs of the business and its employees. They also predicted that employers faced with these costs would rather drop coverage.

     But today, 96,000 more people in Massachusetts get their health insurance through their employer than before reform. The reason for this increase is that workers who are required to have insurance have few options. Most must take the health coverage they are offered, at the price offered.

     If an employer with more than 50 full-time workers offers a health plan and pays for at least one-third of the premium, employees are no longer eligible for state-subsidized care, regardless of their income. They can forgo health insurance and pay a fine for flouting the law unless their premiums are deemed unaffordable. But if they want health insurance, they must take what is offered to them by their employer.

     The insurance may not be affordable to workers, and though legislators could have required employers to pay more toward their workers’ insurance or pay heavier fines for not doing so, such a stance would have doomed the Massachusetts legislation to failure, Lord says.

     “Clearly, putting higher spending contributions on employers would have been controversial,” he says.

     The state has been hesitant to extend a helping hand beyond the assistance it already provides. This year, Massachusetts is providing subsidies to 180,000 residents who earn up to 300 percent of the federal poverty level, at a cost of $724 million, says Richard Powers, a spokesman for the state’s Commonwealth Connector. There are, however, 600,000 workers who get their health insurance from employers and who earn 300 percent of the poverty level. Had the state allowed into the program workers whose health care premiums were deemed too expensive, the cost would have been enormous, Lord says.

     And while many workers presumably receive generously subsidized insurance from their employers, the cash-strapped state, facing a budget shortfall because of the recession, can barely afford to provide insurance assistance to those who are already eligible for it, Powers says.

Work less, get cheaper health care
    Some workers nevertheless are trying to get state-subsidized care. To get around the requirement that they purchase their employer’s health insurance, some people have made themselves ineligible by working fewer hours. By becoming part-timers and earning less, they become eligible for state-subsidized health care.

     Carol Regan, director of government affairs for PHI, a research and advocacy organization for home health care workers, calls this race to the bottom one of the “perverse employment outcomes” of the state’s health reform law. It creates what economists call “implicit marginal tax rates,” a situation in which subsidies create incentives for people to work less because working more would mean reduced benefits.

     In a recent survey, PHI reported that 25 percent of home health care agencies said they reduced workers’ hours or made it harder to become a full-time employee to make the workers eligible for state-subsidized care.

     “These disincentives to work are problematic in the home health care industry,” Regan says, adding that workers are in demand. “It’s a fast-growing industry. How do you get enough people to work there?”

     While the recession has ensured a steady stream of job applicants, agencies nonetheless acknowledge that some health care aides work several part-time jobs so they don’t become full-time employees. Doing so allows them to become eligible for state-subsidized health care if they meet the income requirements.

     “I think people will go where it’s least costly to them,” says Bob Dean, vice president of All Care Resources, a home health care agency in Wakefield, Massachusetts. “If they are working a full-time job, then they’re basically just working to pay for insurance.”

     The lesson from Massachusetts is that national health care reform that requires all people to buy insurance coverage must not make it so onerous that working becomes a disincentive.

     “If the cost of health care and the cost of living continue to go up, a lot of people are going to just stop working and go on welfare and get the health insurance that the government offers, if that would be in our benefit,” Desrosiers says, speaking a day after Scott Brown was sworn into office as the 41st Republican senator. “I just hope it doesn’t get to that point. I’d rather make my own money than wait for the government to give it to me, you know what I’m saying? I hope all parties get involved and come up with a solution that is best for everybody.”

Higher costs for older workers
    Of course, Desrosiers is determined to work. For now, she prefers to pay higher health care costs by working harder and earning more. So too does Sandra Broughey, another home health care aide. Broughey, 58, could have gone without insurance rather than increase her hours in order to pay the $57 a week required for her insurance premium. And for many years, Broughey did go uninsured.

     But a series of health problems—a tumor in her eye, a lump on her chest—changed her thinking. She was glad that reform forced her to get coverage, first through the state, then through her employer.

     “I tell my company all the time that I’m so glad I had what I had,” she says.

     Trigilio, president of the company that employs both Desrosiers and Broughey, says that three years ago, when the reform law went into effect, he spent 2 percent of his payroll on health care. Today he spends 8 percent. And next year he expects to pay 10 percent of his payroll on health care costs. Most home health care agencies have workers like Broughey—older women who are at risk for on-the-job injuries. The rate increases that the agencies have experienced have put health care further out of reach for their average workers.

     “When we go out to get health insurance, we get [killed] on our rates because we have women, they’re mainly middle aged and they work in the health care industry—that alone adds 25 percent to the cost,” says Morin, comptroller of Intercity Home Care in Salem.

Stretched thin
     Desrosiers works full time for one agency and part time for three other health care employers and makes $12 to $15 an hour. On a recent Friday afternoon, she was just finishing up a double shift that had begun at 11 p.m. the previous evening at an elderly client’s house. She was hoping to arrive home before her two youngest daughters returned from school.

     “When I get home I will cook for my girls, then we’ll do some homework,” she says. After that, she’ll have a quick nap and be out the door before 6 for another overnight shift, which is often quiet enough to grab a snooze.

     Since Desrosiers can work only when she is needed and gets paid only when she works, she works whenever she can. Her days off are few and far between. Her dreams of becoming a nurse are on hold.

     “When I feel my body getting very tired, I just take the time off without pay,” she says. “Because my job does not have paid sick days, if you take the time off you don’t get paid.”

     Democratic health care reform proposals, including the Obama administration’s, provide generous subsidies to workers whose premiums eat up a large chunk of their income. But employers have criticized those proposals for including penalties against businesses while not doing enough to bring down the cost of health insurance.

     Trigilio is all for providing health insurance, “but companies like ours can only offer so much,” he says.

     Americans wonder whether they will be able to afford health insurance if it is required by law. The same question worries employers as they consider their own financial viability. In Massachusetts, policymakers decided to put most of the burden on workers rather than employers. Federal reform could provide subsidies to low-income workers, but unless it also can bring down health care costs, reform will amount to cost-shifting to businesses and the federal government.

     For low-wage workers, especially for home health care aides like Desrosiers and the businesses that hire them, national health reform represents a major test of the employer-based health care system. Desrosiers says she would measure the success of national reform by the size of her savings account. By that measure, reform in Massachusetts has fallen short.

     “I thought it was going to help me,” Desrosiers says. “I thought it was a great opportunity for families like mine to have health insurance. We could pay less money for health insurance and have more money for savings. I have a checking and savings account and the savings has nothing. You can’t really save, my friend. You can’t really save.”     

Workforce Management, March 2010, p. 17-20 — Subscribe Now!

Yet the government’s fiscal analysis contradicts that conclusion. According to two estimates from the Congressional Budget Office, the House bill would actually strengthen employer-sponsored health care by increasing the number of Americans who get their insurance through work.

A bill under consideration in the Senate, meanwhile, is likely to reduce the number of people who get insurance through their employers. Yet, employer associations have said that while the Senate’s legislation is far from perfect they prefer it to the reform bill passed by the House.

So who is right? Which version of health care reform is most likely to bolster the employer-based health care system, which many employers claim to support?

While fully predicting the consequences of legislation not yet enacted is impossible, the two preliminary estimates created by the CBO and the Joint Committee on Taxation show that increasing coverage is not the best measure—at least in employers’ eyes—of the success of health care reform.

“Why we came to the reform table was to reduce the cost of care, of coverage,” says Neil Trautwein, vice president of the National Retail Federation.

Rather than reduce overall health care costs, employers say the reform bills increase coverage by limiting the freedom of employers to provide health benefits as they see fit.

“There’s a real concern under pay-or-play mandates whether employers can maintain their flexibility to fashion benefits that are right for their employee populations,” says Andrew Webber, president and CEO of the National Business Coalition on Health. Since both bills are likely to impose some requirements on employers, it is likely that reform will, to a degree, force employers to rethink the scope and nature of the benefits they provide to employees.

That’s because lawmakers, with the help of economists, have focused on penalizing employers that do not offer adequate coverage as a way to pressure them to provide workers with richer health benefits. Most of the money allocated in the approximately $1 trillion reform bills ($1.05 trillion in the House; $849 billion in the Senate) will go toward subsidies that make it easier for individuals—and, to a lesser extent, small employers—to obtain health insurance. Much less money is devoted to changing the health care system to bring down costs.

“I think the way the mandates with penalties were built, the objective was not to get employers who do not offer coverage to offer coverage but to make sure employers that do offer coverage don’t drop it and buy it on the exchange,” says Jon Gabel, a health care economist and senior fellow at the National Opinion Research Center.

Gabel and other economists say, however, that the penalties as they are crafted are not stiff enough, leaving many employers to pay a fine rather than improve health coverage. A weak penalty, they say, is the surest way to erode the system of employer-based health insurance. The more the penalty resembles the cost of providing insurance, on the other hand, the greater the likelihood employers will provide coverage. And the penalties in the House bill are higher than in the Senate version—one reason why more people will be covered by an employer if the House measure passes.

Under the House bill, most employers that do not provide coverage that meets the bill’s minimum standards will pay a tax equal to as much as 8 percent of their payroll. For this reason, more employers are likely to offer health insurance under the House plan. The CBO estimates that the House bill would increase the number of people insured by employers by 6 million by 2019. That would mean 57 percent of nonelderly individuals would get their insurance through an employer, up from 56 percent today.

By contrast, the Senate’s health reform plan, which levies a smaller annual fee of $750 per full-time employee against employers that do not provide insurance, would reduce the number of Americans with employer-sponsored health insurance by 5 million people by 2019. Already, employers are weighing the cost of these penalties against the cost of providing insurance. Karen Kulp, president of Philadelphia-based home health care service Home Care Associates, says the insurance she provides to more than 100 workers is more expensive than the penalties in either bill. She says she is likely to stop offering coverage to her employees if reform is passed.

“I think we would save money,” she says.

Some employers say the minimum benefit requirements in the bills would make insurance too expensive, causing them to drop what they already offer rather than upgrade it.

That is the view of Michael Perlman, CEO of BrandsMart, a midsize consumer electronics retailer in Florida. He says he is likely to drop the health insurance he offers to his 2,700 employees because it will not meet the minimum coverage standards of the bill in the House. Perlman opposes the regulations, especially the House plan, because they would increase his health insurance costs. By contrast, he would save $1.4 million annually by simply paying the fine.

“My company, in this economy, can’t afford this plan,” Perlman says. As a consumer electronics and appliances retailer hard-hit by the recession, Perlman say his profit totals 1 percent of his revenue, down from 3.5 percent a few years ago.v Although the House bill provides a five-year grace period before companies that already offer health insurance have to comply with the new minimum standards, the current bills are likely to make employers reconsider whether to continue providing health insurance at all, says Paul Fronstin, senior research associate with the Employee Benefit Research Institute.

“I think it’s safe to say that all employers will rethink their health benefits strategy,” if reform is passed, he says. Employers may find it more cost-effective to pay a penalty and simply provide supplemental health benefits to employees in the form wellness and prevention programs.

“That is one way employers can change their benefits,” Fronstin says. “They offer something to keep workers healthy because that impacts absenteeism and presenteeism.”

Employers that are most likely to drop coverage in favor of paying a penalty are small businesses and employers with low-wage workers, according to the CBO estimates.

Under the House legislation, employers that do not offer adequate insurance would have to pay a sliding-scale penalty of between 2 and 8 percent of their payroll. Employers must also pay 72.5 percent of the premium for individual plans and 65 percent of the premium for family plans. Employers would also have to provide plans with a minimum actuarial value of 70 percent—meaning the employer covers at least 70 percent of the total cost of coverage, which is more than is paid by retailers like BrandsMart.

“There is not a retailer today that would meet those requirements,” Trautwein says. If employers do not meet these standards, employees would be eligible to buy insurance through the health insurance exchange. Lower-income workers would have access to subsidies from the government to help pay for insurance.

Employers are quick to point out that estimates like the CBO’s have not always stood the test of time. After Massachusetts passed a health care reform law in 2006, many predicted that the relatively weak penalty against employers would lead them to drop coverage. That has not been the case. Today, more Massachusetts residents get their insurance from an employer than before reform, even when taking into account a large drop in enrollees between 2007 and 2008 because of layoffs due to the recession, according to state enrollment figures.

But there are many caveats to this statistic, says Rick Lord, president and chief executive of Associated Industries of Massachusetts, a business association.

“I don’t know if the experience here is directly transferable to the nation,” says Lord, who is also on the board of the Commonwealth Health Insurance Connector Authority, the state-run health insurance exchange. “We have fewer low-wage workers. We had [a] higher number of employers offering health insurance to start with and we have a culture of employers offering health insurance.”

The Massachusetts experience and national reform efforts overlap on the requirement that individuals purchase insurance. The federal law would ensure that both healthy and sick people buy insurance, thereby spreading the cost of health care among people who spend less on health care than they pay into the insurance system. This would give employers an incentive to provide insurance: Since individuals must be covered somehow, getting insurance from an employer is easier and, for those who do not qualify for subsidies, it would usually be cheaper.

“Employees need to have health insurance, or else they pay a fine,” Lord says. “That puts pressure on businesses that are looking to attract employees.”

Lord says the requirement in Massachusetts that individuals purchase insurance may be the most important element of any reform bill—something economists, lawmakers and employers agree on. They also say the penalty in the Senate’s reform bill for individuals who do not purchase insurance is not strong enough.

Commenting this fall on a version of the bill that appeared in the Senate, James Gelfand, a senior manager for health policy at the U.S. Chamber of Commerce, said the fine on people not purchasing coverage was not severe enough. He added: “If the individual mandate doesn’t work, then this bill doesn’t work.”

Unless the fines are higher, it will be cheaper for individuals to wait until they get sick before purchasing insurance. This is similar to the argument used against employers: If fines against employers that do not offer insurance are not high enough, it will be cheaper for them to drop coverage altogether.

For employers like Kulp, who is proud that her home health care business has offered employees health insurance for years, dropping coverage is simply a matter of economics. She says she spends 18 percent of her payroll on health insurance, an amount that is going up every year. It’s reaching the point where fewer and fewer employees, who earn about $10 an hour, can afford to take her up on the insurance she offers.

Kulp is more attached to the idea of staying in business than maintaining the system of employment-linked health insurance, especially if reform means her employees can find affordable coverage elsewhere. For this reason, she supports health care reform—even the bill in the House—as a way out of burdensome costs.

“I believe we will save money,” she says. “Right now my health insurance costs 18 percent of my payroll. So if you’re talking 8 percent,” the maximum fine, “that’s a big difference.”

This article was originally published in Workforce Management and, later, by Crain’s Detroit Business.

Williamson, a professor at the Haas School of Business at the University of California, Berkeley, and Ostrom, an economist at Indiana University, were praised for studying the way economic decisions are made outside markets.

Ostrom, the first woman to win the prize, focused on how natural resources are shared, and ultimately better managed, among various groups rather than by a central government or through complete privatization.

Williamson’s research shows that companies, not markets, are sometimes better equipped to handle business transactions that are tailored to a company’s needs. While that may appear obvious, Williamson’s research showed how, why and when that is so, particularly when employers look to contract for services outside the firm.

“A very important part of Oliver Williamson’s contributions [was] precisely about how to think about the cost and benefits of outsourcing and contracting decisions,” says Steven Tadelis, a professor at the Haas School of Business.

Williamson illustrated that a special economic and legal relationship exists between employers and employees, and it can be lost when a company outsources its work. While many management professionals intuitively understand that employees can’t be easily replaced by contract workers, most economists viewed work as a financial transaction, not as a “system embedded in law and authority,” says Witold Henisz, a professor of management at the University of Pennsylvania’s Wharton School.

“There is a range of discretion you have as a manager that you don’t have over an external consultant,” says Henisz, who was a student of Williamson’s.

It’s particularly important with highly specialized tasks that require a dedicated investment of skill and money, which often can be more effectively completed internally than by buying those services in the market, says David R. Henderson, a research fellow at the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, California.

Williamson’s research helps explain why companies that have outsourced complex, unique business processes have run into cost overruns that lead them to bring the functions back in-house. Firms have little bargaining power to get outsourcing partners to make changes without having to pay more.

A recent example is Boeing’s costly, overdue production of its 787 Dreamliner, much of which had been outsourced. Boeing recently decided it needed more control over the complex production process. It canceled contracts and acquired some of the companies that were making the jet’s parts.

“I need to be very sure I can specify what I need in advance and wouldn’t have to ask for changes later” to make outsourcing contracts cost-effective, Tadelis says.

A contract employee is like an outsourcing company, and the same thinking can be applied to how companies use bonuses and other incentives, Tadelis adds.

Like contracts, firms should negotiate bonuses based on the complexity of the work. For example, a company could pay a worker a bonus for simply completing a complex project. For projects that are much simpler, firms could pay bonuses based on getting the job done within a certain amount of time and under a certain cost.

“The type of incentive depends on the complexity of the work,” Tadelis says. Williamson’s work has many applications beyond economics, Tadelis says. “Fortunately this Nobel Prize will spur a lot more interest in it.”

Back to the Drawing Board—Can a New Company Culture Save General Motors?

Click here for a link to this story as it appeared in Workforce Management magazine.

By Jeremy Smerd

By the time Fritz Henderson was named CEO of General Motors on March 30, he was already looking beyond the company’s restructuring. A finance guy with a knack for numbers, Henderson was talking intangibles—the kinds of things that are hard to articulate, harder yet to teach, but, in a successful company, as easy to spot as profit and loss. He was thinking about a company’s culture.

Shortly after he replaced Rick Wagoner as CEO, he turned to then-head of HR Katy Barclay. “Well, he came to my boss, Katy Barclay, and said, ‘You know, I want to start having a dialogue about culture,’ ” says Chris Oster, director of global change management and organizational development. “ ‘I think I know what I want the cultural priorities to be. I think I know what the organizational design needs to be, but I don’t want to do that alone.’ ”

The company entered Chapter 11 bankruptcy protection in June and emerged five weeks later, a couple months short of its 101st birthday. With the intervention of the U.S. government, the automaker has slashed headcount, eliminated vehicle brands, shuttered dealerships and reduced its debt and benefit obligations.

GM is running much leaner. It now operates with 101,000 employees in North America, of whom 27,000 are salaried workers. In 1998, GM employed 226,000 workers in North America.

Equally important, bankruptcy inspired radical change in the operations of the new GM. Out of about 15 bullet points scribbled on a piece of scrap paper, Henderson distilled his vision of the new GM’s culture to four precepts: risk-taking, accountability, speed and, at the heart of it all, customer and product focus.

Henderson immediately employed at least one of those values—speed. By the end of July, the top of the organization had been restructured and HR’s role in organizational change was defined: It would support culture change, but not drive it. Company leaders developed a process to put Henderson’s precepts into practice, including a new performance management system, an education series to explain the new culture, a communications drive to articulate the values, and a project called Building the Movement.

Building the Movement would infuse GM with its new culture without making it a top-down process. At this point, the new cultural initiatives have been limited to the salaried workforce.

Whether the company can put these new principles into widespread practice—and even whether these new values will lead GM back to profitability—are questions yet to be answered. The future of the company, and the $55 billion of taxpayer money that it has received, hangs in the balance.

A history of culture changes
While GM is fixated on the company’s future, any student of automotive history can tell you the company has tried before—with mixed success—to reinvent itself. The company’s past is littered with the buzzwords of culture change: GoFast, a program to reduce bureaucratic waste; Synchronous, a top-down process engineering program; and GMS, the company’s version of the lean production system that has made Toyota and other Japanese manufacturers ascendant. Current and former employees say that in all those cases, GM struggled to impose cultural change across the highly bureaucratic company in which brands, departments and regions operated like self-governing and competing states within a federation.

——————————————————————————–
“GM is an organization that if you went to a psychiatrist he would have prescribed electroshock treatments. Bankruptcy is electroshock.”
—Gerald Meyers, a former CEO of American Motors Corp.
——————————————————————————–

“I’m not sure that we didn’t have too much of segmentation,” Oster says. “That sometimes when we would have a corporate or enterprise-wide initiative, you know, you had to sell it to each space, get them on board. It’s very challenging. And people would say, ‘You know we already got something going on here.’ ”

The difference this time, GM executives say, is the bankruptcy and the simultaneous culling of leadership, an experience that has been both traumatic and salutary.

“GM is an organization that if you went to a psychiatrist he would have prescribed electroshock treatments,” says Gerald Meyers, a former CEO of American Motors Corp. and now a professor at the Ross School of Business at the University of Michigan. “Bankruptcy is electroshock.” Sitting in a conference room overlooking the Detroit River at GM’s Renaissance Center headquarters one morning in August, Oster variously described bankruptcy as a “tonic,” an “enabler” for change and a “gift.” Like other executives who have survived the upheaval, Oster has embraced GM’s new cultural priorities with the fervor of a convert after a near-death experience.

Oster says that as early as November 2007, GM executives began to say, “We need to work on culture.” But executives clearly did not have the stomach or wherewithal to make the necessary changes despite workforce reductions and bureaucratic streamlining that had been under way for at least five years. The Obama administration’s rejection of GM’s restructuring plan in March made clear that anything short of a complete overhaul would be insufficient. Katie McBride, executive director for global internal and executive communications, says that bankruptcy forced executives and the entire salaried workforce to change or leave the company.

“In the 26 years I’ve been here there have been times when senior managers have pushed cultural change and there was resistance from the workforce. Then there have been times when the workforce wants to change and resistance comes from senior management,” she says. “Now there’s been a significant emotional event. And senior managers are changing. At every level people realize we cannot do things like we formerly did. There’s tremendous opportunity to do it this time because there’s not the resistance that there was … because we went through the bankruptcy.” Henderson has told employees not to let this crisis pass without taking advantage of it. Without the usual resistance to change, the company has been able to make organizational changes at speeds previously unknown at GM.

Embedding four core values
Shortly after Henderson became CEO, he asked Oster, GM’s soft-spoken culture guru, to figure out how to embed those four core values—customer/product focus, speed, risk-taking and accountability—into the company’s fabric and the mind-set of its workforce. Oster helped to assemble two teams: an operating model team and a culture transformation team.

The company removed other layers of bureaucracy, most notably eliminating the company’s automotive product board and automotive strategy board. On July 23, GM announced that both boards had been replaced with a single eight-person executive committee to “speed day-to-day decision-making.” The board reports to Henderson and meets twice a week to discuss business and product issues, McBride says.

Intentionally, no HR executives were appointed to either team—though the culture transformation team did include Mary Barra, a manufacturing executive who would later be named global head of HR.

“We’re stewards of the system,” Oster says. “The system of culture is the responsibility of the leaders. It’s our job to cajole and provide supportive ideas and mechanisms and help to hold them accountable and keep it in front of their face—but no, no HR people on these teams.”

Nor was the head of HR appointed to the new executive committee. Previously, the head of HR was part of the company’s automotive strategy board; now the head of HR reports directly to the CEO.

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“At the end of the day, everybody had an excuse for why results were not as promised. Everything became a compromise to all parties.”
—Rob Kleinbaum, GM executive-turned-consultant
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“People can focus on it to mean HR doesn’t have a seat at the table. That can be a pretty obvious observation,” Oster says. But, she explains, Henderson believes that employees in the past spent too much time in meetings and preparing for meetings that were unproductive. In his quest for transparency, Henderson has established something of an open-door policy and, Oster says, encourages HR executives to simply bring issues directly to him.

“I think Fritz’s concept as I’ve heard him discuss it is, we don’t need everybody sitting around this table all the time, taking up a lot of productive work time. Whenever you need to, just bring it on in. And so that’s what we’re doing.” The operating model team, comprising 10 executives from various divisions worldwide, overhauled the company’s bureaucracy and the decision-making process at the top levels. Notably, Oster says, it dismantled GM’s bureaucratic “matrix” structure.

Criticized by some as byzantine, the matrix was intended to foster collaboration by having workers report to various managers in different departments simultaneously. Rob Kleinbaum, a GM executive-turned-consultant, said the matrix made it difficult to hold managers accountable because responsibility for decisions was diffused among multiple supervisors.

“At the end of the day, everybody had an excuse for why results were not as promised,” Kleinbaum says.

“Everything became a compromise to all parties,” says Kleinbaum, who wrote a paper in January, “Retooling GM’s Culture,” that was well-received by both the U.S. Treasury’s Automotive Task Force and GM. The paper said changing “structural” costs would not save GM. It needed to change its culture. Executives needed to be held accountable for results and performance; employee education needed to include exposure to how other industries and companies operate; promotions needed to be based on merit, not patronage; and meetings could not remain “exercises in procrastination, rubber stamping or idea killing, without anything that would pass for genuine debate and dialogue,” Kleinbaum wrote.

Henderson, who is known to be plain-spoken, accessible and unpretentious—as CFO he would travel in economy class while commuting to Detroit from his home in Miami—read Kleinbaum’s report and sent him an e-mail on May 9 praising the report and saying it had “touched on a number of important points as we look forward regarding culture.”

Paraphrasing Albert Einstein, Henderson wrote that “the definition of insanity is doing the same thing over and over again and expecting a different result. This is especially and directly relevant with regard to culture.”

Shifting the culture
On July 30, GM announced its “simplified leadership team” and the retirement of Barclay, who had worked in human resources at GM since 1978. That Mary Barra, her replacement, is an engineer was a fact that pleased many current and former engineers at the company. They felt that HR did not reflect the manufacturing ethos of efficiency and continuous improvement.

GM declined to make Barra or Barclay available for this article.

Having an engineer as the head of HR will be “a major adjustment for those [in HR],” says Matthew Beatty, a process-improvement coach who was laid off after 28 years at the company, including eight years in HR. “And I’m not sure that’s a bad thing.”

At the end of July, with the structural changes in place, GM disbanded the operating model team and focused squarely on changing its culture. That task fell to the 12-member culture transformation team, led by Oster and supported by HR.

Meeting Tuesday nights, the culture team came up with four ways it felt it could embed the new culture in the company’s day-to-day operations: The company would replace its performance management system; it would create an education series to explain what the new culture is and what is expected of leaders; it would use internal and external communications to communicate the company’s new values; and finally, it would launch Building the Movement.

Perhaps more than anything else, Building the Movement reflects GM’s new approach toward helping the salaried workforce live the company’s new values of customer/product focus, speed, risk-taking and accountability. The company has set out to identify employees who already exhibit the new values and turn them into models for others to emulate. The change reflects the company’s move away from hierarchical decision-making, Oster says.

“I think in the past … our culture-change efforts were way too top-down. They were rollout-oriented,” Oster says. “So now we’ve got efforts at the base, at the middle, at the top and all throughout.”

To help, GM has hired workforce leadership consultants Jon Katzenbach and Niko Canner, of Booz & Co. Katzenbach’s book Why Pride Matters More Than Money sits on Oster’s desk. Published in 2003, the book has a chapter about General Motors in which Katzenbach acknowledges how large, globally diffuse organizations like GM have trouble exporting cultural change from one niche across the company. The antidote, Oster says, is the Building the Movement concept. Oster credits Katzenbach, whose company declined requests for an interview, for taking complex ideas and making them “actionable.”

The goal is to democratize decision-making, not for its own sake, but so that employees who are closer to a product, a customer or a problem can act quickly and decisively to ever-changing market conditions.

At its heart, the movement appears to be an attempt to implement the new cultural values by teaching workers at any level that they can make decisions in their areas of expertise, rather than go up the chain of command as they did in the past. Doing so would clearly allow the company to move quickly to respond to the needs of customers and products. With individuals making decisions, the company would also have an easier time identifying who is accountable. But all of this requires a certain amount of risk-taking, and as Oster says, “Risk-taking is probably going to be one of the toughest of the cultural priorities.”

The Aztek lesson
In the past, current and former GM employees say, no decision was made without meeting on it first. Given that GM was a company full of engineers and finance managers, every decision required reams of data. With entrenched hierarchies and bloated executive ranks, no one wanted to criticize a project that wasn’t working for fear of a boss’s reprisal, current and former midlevel managers say. Decisions were made slowly and often to the detriment of a product. A classic example is the Pontiac Aztek, a midsize sport utility vehicle.

Brenda Peinado, a global supply chain manager who was laid off in April after 25 years with the company, said she worked with engineers on the Aztek, which had gotten bad reviews from internal focus groups before it was launched in 2001.

“Nobody had the guts to say ‘Stop,’ ” Peinado says. “We know for a fact that they were getting bad feedback.” The homely Aztek was widely criticized as being designed by committee. Rated the ugliest vehicle ever by readers of the Daily Telegraph in London and one of the worst cars of all time by Time magazine, the Aztek was discontinued in 2005.

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“I think in the past … our culture-change efforts were way too top-down. They were rollout-oriented. So now we’ve got efforts at the base, at the middle, at the top and all throughout.”
—Chris Oster, director of global change management and organizational development, GM
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By contrast, the new GM has moved swiftly to kill products deemed unpalatable by focus groups. Characteristic of the zeal radiating from the new GM, an executive announced on a GM blog that the new executive committee had decided to kill a Buick model days after it was unveiled to customers and the media.

“And what we decided to do in response is a good example of the essence of the new General Motors … acting quickly, and boldly, and listening to feedback from customers, employees, dealers, media and just about anyone else with an opinion,” wrote vice chairman Tom Stephens.

On whiteboards in one of GM’s conference rooms is the culture team’s suggestions for how to institute—through processes and policies—their new cultural priorities: “zero tolerance” for leaders who do not demonstrate the new cultural priorities; design leadership forums; create an induction to the new GM principles; build trust; help people make better decisions on their own.

“That’s a lot of what Fritz is after,” Oster says. “Take out layers, take out junk. Trust me to do my job.”

Real change this time?
Will the appetite for change and for risk remain once the effects of bankruptcy wear off? GM has a history of trying to change its culture. No effort ever went far enough. The company’s internal Web site contains the remnants of past efforts. Headings of old mission statements sound eerily familiar. “Cultural Priorities,” one reads. “Enhance our product and customer focus; embrace stretch targets; move with a sense of urgency.”

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“It is easier to take risks when you have no choice. Like a quarterback with one second left in the game, it’s easy to throw a Hail Mary pass.”
—Sreedhar Bharath, assistant professor of finance, Ross School of Business
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As if to repudiate the similarities between past culture efforts and the current one, Henderson wrote during a June Web chat with employees and the public that speed is not “a sense of urgency, it is speed.”

But if bankruptcy spurs change, success after bankruptcy can lead back to complacency, says Sreedhar Bharath, assistant professor of finance at the Ross School of Business at the University of Michigan. The closest example is Chrysler in the 1980s. After emerging from near-bankruptcy in 1978, Chrysler had a hit with the invention of the minivan. The company then hoarded cash and, fearful of taking missteps that might lead to ruin, returned to risk aversion, Bharath says.

“It is easier to take risks when you have no choice. Like a quarterback with one second left in the game, it’s easy to throw a Hail Mary pass,” Bharath says. “But then once you get a lead, many teams play conservatively to cling to their lead. Then they end up losing. That is exactly when they don’t take the positions they should take. I think that analogy applies to business.”

So far, in the immediate aftermath of bankruptcy, the company is living the new culture. And employees are noting a difference. Risk-taking is encouraged. Communication is better, they say. The company is more transparent.

“This is going to be a great company to work for,” says Michelle Valentine, an engineer who retired this month. “I can see it already.”

During the June Web chat, Henderson got a pointed question from one participant, who asked bluntly why he thought GM would succeed. Henderson replied that until now he had spent 95 percent of his time on the company’s “massive problems.”

He also wrote in his reply: “We have a once in a lifetime opportunity to get these problems solved permanently so we can get back to how to truly win, which is being obsessed as a company with fantastic products and delighting customers.”