GM Sets a Record, And Its Story Gets Even Worse

Setting records is a goal that most companies hope to attain, but in the case of General Motors (GM), this is one record that the automaker would rather not embrace. According to the National Highway Traffic and Safety Administration (NHTSA), U.S. Department of Transportation, as of May 20, 2014, GM has recalled 13.5 million of its vehicles in the U.S. due to safety concerns (and 15.4 million vehicles worldwide, or nearly 150 percent of its entire 2013 production), exceeding its record safety recall of 10.7 million U.S. vehicles in 2004. And GM still has over seven months left in this calendar year.

GM shares have, not surprisingly, also been negatively affected, with its share price finishing at $33.07 on Tuesday, barely above its $33.00 initial public offering price, with a reported $1.7 billion in charges taken by the company this year due to its 29 separate safety recalls this year ("GM Recall Costs Rise to $1.7 billion", Jeff Bennett, May 21, 2014, B1). As the The Wall Street Journal reports, "[A] GM spokesman couldn't say whether the bulk of the recalls are now done. He said the auto maker is continuing to look for and respond to safety issues."

Last week the NHTSA announced that, in a Consent Agreement resulting from its investigation, GM agreed to pay a record (and maximum) fine of $35 million civil penalty and participate in "unprecedented" oversight requirements as a result of safety defects (failure of a non-deployment of airbags) in certain Chevrolet Cobalt and other GM models, and the failure to report a safety defect (faulty ignition switches) in nearly 2.2 million vehicles to the agency in a timely manner (within five business days) ("General Motors Agrees to Pay Maximum of $35 Million Penalty for Violating Federal Safety Laws in Chevrolet Cobalt Investigation, National Highway Traffic Safety Administration, May 16, 2014, NHTSA 18-14).

In the Consent Agreement, GM was ordered to make "significant and wide-ranging internal changes to its review of safety-related issues in the United States, and to improve its ability to take account the possible consequences of potential safety-related defects. GM will also pay additional civil penalties for failing to respond on time to the agency's document demands during NHTSA's investigation." Under the Consent Agreement, the NHTSA will be able to immediately enforce provisions if GM does not fully comply. "No excuse, process, or organizational structure will be allowed to stand in the way of any company meeting their obligation to quickly find and fix safety issues in a vehicle," said NHTSA Acting Administrator David Friedman.

The Wall Street Journal reported ("U.S. Says GM Hid Recall Failures", Jeff Bennett and Joseph B. White, May 17-18, A1-2) that the NHTSA found that GM management knew as early as 2001 that the design of ignition switches used in the Chevrolet Cobalt, Saturn Ion and other compact cars built in the mid-2000s could slip out of the "run" position while the auto was being driven, cutting power to steering, brake assist and air bags. Furthermore, in an internal training program, GM encouraged employees to avoid phrases including "Corvair-like" and "rolling sarcophagus." GM has identified 13 deaths linked to this particular safety issue. "Employees of General Motors, from engineers and investigators all the way up through executives were briefed on information associated with this recall," said NHTSA Acting Administrator Friedman.

At its Website, the "new" General Motors has a page titled "Corporate Responsibility", where under "Social Responsibility" lists (alphabetically) five sub-categories of "Community", "Diversity", "Environment", "GM Foundation", "GM Global Aid", and "Safety". Under "Safety". GM lists the following: "Quality and safety are at the top of the agenda at GM, as we work on technology improvements in crash avoidance and crashworthiness to augment the post-event benefits of OnStar, like advanced automatic crash notification. The bleak irony of this statement cannot be lost on any observer of GM's present dilemma.

In their July 2011 empirical study, economists Matthew J. Kotchen and Jon J. Moon, in their National Bureau of Economic Research working paper (Corporate Social Responsibility for Irresponsibility", No. 17254) hypothesized that companies engage in corporate social responsibility (CSR) in order to offset corporate social irresponsibility (CSI). Utilizing the main reference source on CSR, the Social Ratings Database of KLD Research & Analytics, Kotchen and Moon found that over a 15-year period (1991-2005) there is general support for the causal relationship that when companies do more "harm", they also do more "good", i.e., negative scores on corporate social irresponsibility, or CSI, predicted positive scores the following year. While CSI motivated a number of CSR programs, companies tended not to reform their overall corporate governance. Instead, companies that exhibited CSI in areas such as community relations, the environment, and human rights would institute CSR programs in these same areas.

This "reactive" managerial nature of CSR to CSI can be shown in the recent GM press release ("GM Signs Consent order with National Highway Traffic Safety Administration", May 16, 2014). GM CEO Mary Barra announced that, "[W]e have learned a great deal from this recall. We will now focus on the goal of becoming an industry leader in safety. GM's ultimate goal is to create an exemplary process and produce the safest cars for our customers - they deserve no less." Furthermore, according to Jeff Boyer, vice president of Global Vehicle Safety, who is assigned to integrate safety policies across GM, "[W]e are working hard to improve our ability to identify and respond to safety issues. Among other efforts, GM has created a new group, the Global Product Integrity Unit, to innovate our safety oversight; we are encouraging and empowering our employees to raise their hands to address safety concerns through our ‘Speak Up for Safety Initiative', and we have set new requirements for our engineers to attain Black Belt certification through ‘Design for Six Sigma'." Thus, GM is instituting new CSR efforts in the same area.

No one should argue with the announced socially responsible program efforts that GM is undertaking to address its safety issues. The "old" GM ethical organizational culture regarding the importance of safety as being "at the top of the agenda" was obviously ignored, especially during the recession - the bleak economic period that effectively finished the "old" GM during the latter part of the previous decade. The "old" GM effort at being a "good" corporate citizen fell far short of active, inquiring managerial/board "engagement" and oversight, resulting in an unethical, and socially irresponsible, organizational climate that hindered attempts to learn about the defective ignition switches.

Economist Colin Mayer, in his recent book (Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It, Oxford University Press, 2013), addresses the status of CSR in modern corporate governance: "Corporate social responsibility (CSR) was rightly dismissed when recession forced a return to more traditional shareholder value," says Mayer. In his book, Mayer goes on to say that "[T]here is no value associated with it or loss in value from not complying with it." Mayer might be right in his analysis in the short-term; but this analysis is not likely to hold up in the long-term.

How this safety issue resonates with the corporate governance structure (and the accountability of internal control systems) of the "new" GM is still too soon to tell. However, this negative reputational impact on GM will likely resonate with consumers and influence their future buying decisions, as well as that of investors. Already, The Wall Street Journal, on May 21, 2014, reports that two prominent investors, Warren Buffett and David Einhorn, have sold GM shares, with Buffett selling 10 million of his 40 million shares. Other long-term challenges facing GM include dozens of civil lawsuits from families suing GM for deaths of family members; a criminal investigation by the U.S. Department of Justice; numerous investigations by state attorneys general; and an investigation by the U.S. Securities and Exchange Commission. Moreover, U.S. Department of Transportation Secretary Foxx is strongly encouraging the U.S. Congress to support the Department's newly unveiled 350 page "Grow America Act" bill, which includes a provision increasing the maximum penalty that NHTSA could assess in cases like that uncovered at GM from $35 million to $300 million. One lesson hopefully learned by the "new" GM operating in our real-time, global "Information Age" is, that if you are publicly identifying yourself as a "socially responsible" company, you had better act like it.