General Motors (GM) CEO: Mary T. Barra Inspect the 10-K 1. What is the opinion of the auditors about the financial statements? The opinion might be that the financial statements are ‘fairly presented.’ The opinion might be that the financial statements are not fairly presented. -The opinion of the auditors is that the financial statements are presented fairly, in all material respects, the financial position of the company at Dec. 31,2020 and 2019, and the results conform with US generally accepted accounting principles. (Page 47) 2. Who audits the financial statements? The Big4 accounting firms are (1) Deloitte, (2) Ernst & Young, (3) KPMG, and (4) Price Waterhouse Coopers. They audit most publicly available companies. State who audits your companies – Ernst & Young audited GM. Serving as the auditors since 2017. 3. Most, but not all companies, evaluate their internal control over financial reporting. In the opinion of

the management, does the company have good internal control? This is frequently described at Item 9A

Controls and Procedures.

-Management deemed that their internal control over financial reporting was effective as of Dec 31, 2020. These internal controls were also audited by Ernst & Young and they concluded that GM maintained effective quality control. (Page 99) 4. What standard does the company use to evaluate whether the internal control is satisfactory. This is frequently COSO Internal Control –Integrated Framework (2013), but it might be another standard. – The assessment of the internal control utilized the criteria discussed in the “Internal Control – Integrated

Framework (2013) issued by the COSO. (Page 99)

Inspect the report on management compensation. Most of the time this is included in the proxy. It is in a form that starts DEF. It might be DEF 14A, titled “Other Definitive Proxy Statements,” or something similar. 1. Most companies have a Compensation Committee. How many of the members of the Compensation Committee are independent? -The compensation committee consisted of 4 members: Carol Stephenson (Chair), Wesley G. Bush, Joseph

Jimenez and Patricia F. Russo. (Page 68). The committee is entirely composed of independent directors

determined by the board under NYSE guidelines. (Page 67)

2. Has the company ask for shareholder opinion on management compensation? This is a ‘say-on-pay’ vote.

-Yes, the company has an annual meeting for say-on-pay voting. The company views shareholder engagement as a continuous process and seeks feedback from the shareholders. 96.5% of shareholders voted in favor of the executive compensation programs. (Page 44) 3. Describe a little of how the Compensation Committee makes the decision about pay. a. Do they use an outside consultant to help with the decision or is it based only on their own deliberations? If they use a consultant, who is it? b. Is there a set of peer companies that they use as a comparison? -The compensation uses recommendations from an outside independent compensation consultant. FW Cook was the independent consultant. (Page 67). The committee used members of the Dow Jones Automobile & Parts Titans 30 Index as an OEM peer group. (Page 46) They also used another peer group of 15 companies to inform 2020 target compensation consisting of 3M, Boeing, Caterpillar, Deere & Company, Ford Motors, GE, Honeywell, HP, IBM, Intel, Johnson & Johnson, PepsiCo, Pfizer, Proctor & Gamble, and United Technologies. (Page 47) 4. Describe how much the CEO makes. Include a breakdown of the components of the pay. Commonly, it is salary, bonus, and equity.

-Target – Salary: $2,100,000; Short Term Incentive Plan: $4,200,000; Performance Share Unit: $11,250,000; Stock Options: $3,750,000. (Page 50)

Actual Compensation – Salary: $1,995,000; Short Term Incentive Plan: $3,780,000; Performance Share Unit: $12,988,702; Stock Options: $3,750,000; Restricted Stock Unit: $105,020

5. What measures are used to evaluate management, particularly for the bonus? I hope it’s not a long list

of measures. If the list is long, select some representative measures. Describe the chosen measures.*

a. Is the data item drawn from the financial statements? Which financial statement, Balance Sheet, Income

Statement, or Statement of Cash Flows?

b. If the item is not drawn from the financial statements, what information does it seem to capture?

-STIP performance measures 50% -Earnings Before Interest and Taxes-adjusted (EBIT) ($12.9 B is the target) Focus on Operating Profit and driving strong profitability; 25% – Adjusted Automotive Free Cash Flow AFCF ($7.1 B is the target) Focus on driving strong cash flow for investments; 25% Strategic Goals (25 pts) Focus on performance that aligns to company vision and drives business results. (Page 51)

EBIT is from the income statement. Net Income is the accountant’s measure of profitability. Both Interest and Taxes are expenses to arrive at Net Income on the income statement. The measure, EBIT, uses profitability without the subtraction of Interest and Taxes. This suggests that management is incentivized to pay careful attention to aspects of profits other than interest and taxes. AFCF is from the statement of cash flow, and some detail in the computation is provided in the proxy’s Appendix A. I speculate that AFCF is used because the company’s traditional core focus is on automobiles.

LTIP performance measures

50% – Relative Return On Invested Capital-adjusted (ROIC) (20% or higher returns in vehicles and technology); 50% Relative Total Shareholder Return (TSR) (Shareholder returns outperform OEM peer group) (Page 52)

ROIC is EBIT/Average Net Assets. Net Assets is Shareholders’ Equity. This is profitability scaled by the level of shareholders’ equity, resulting in a percentage figure. A percentage figure can be compared across companies of different sizes. For example, profits of $100 may seem not as good as $200. However, if the profits of $100 are generated using assets of $500, that 20 percent profit figure may be superior to the $200 that required $2,000 of assets to generate a 10 percent return. Both EBIT and Average Net Assets are derived from accounting reports. EBIT uses the income statement as the starting point. Average Net Assets uses the balance sheet as the starting point. Relative TSR is not clearly defined in the proxy, so I looked it up. A shareholder return is the dividends plus the market price increase of a share. Scale the dividends plus the market price increase by the starting market price and the TSR is a percentage. To make the TRS a ‘Relative TRS,’ examine where the company’s TRS ranks among peers. A Relative TSR that ranks near the top of peers is superior to a Relative TSR that ranks at the bottom of the peers. Accounting does not play a role in computing Relative TSR. Market price are determined by the market, and not directly by accounting reports.

6. What does the committee have to say about whether the incentives in the compensation plan can be dysfunctional? -The committee completed an annual risk review and determined that the compensation program included

the following features to mitigate the risk (which the committee deemed as a low-risk program (page 66)):

Mix of pay elements, short-term and long-term programs, adjustments to compensation, compensation

committee oversight, multiple performance measures and stock ownership requirements. (Page 65)

7. If the measures turnout to be wrong, or misreported, does the company have a policy of trying to recover the pay. For example, suppose the bonus depends on net income, and perhaps a year later, the company discovers that the net income was incorrectly reported. Does the company have a policy of trying to recover the pay? -The company does have a clawback policy. The policy includes all executive officers and certain circumstances includes approximately 275 senior leaders. The committee is empowered to recoup compensation paid to executive officers. In the event of misconduct that causes damage to the reputation, material inaccuracy, or accounting restatement the committee may seek to clawback incentive compensation. The committee may also cancel any outstanding equity-based awards to the employee. (Page 66) the policy is publicly available here: investor.gm.com/resources 8. The tax code, Section 162(m), mostly limits deductions for management compensation to $1 million. Is the company seemingly influenced by the tax code limit on deductibility, or is the company mainly concerned with compensation and not the tax deductibility? -The committee choses to align itself to executive pay with performance, regardless of the performance-based

exception being removed under IRS Section 162(m) (Page 67). The company pays executives according the

compensation committee’s sense of incentivizing, and does not consider whether the pay will be deductible

for tax purposes.