Thursday, June 5, 2014

GM, Product Risk and Corporate Governance

We've written many times of the importance of corporate governance.  It becomes readily apparent when something like the GM ignition switch crisis occurs.  The product problem relates to a faulty switch which would turn the engine off with a slight nudge of the knee or when heavy objects (other keys?)  dangled from the keychain.  The company problem is much more complex.  The company links 13 deaths to the problem.  Plaintiffs attorneys suggest a figure considerably higher.  Even one known injury is too many.

The obvious questions to be asked are ones without any suitable answers: Who knew what when?  Top management?  The board?  If they did know, what actions were taken?  If they didn't know why not?  The board states that they were not aware of the problem, yet numerous customer complaints began pouring into the firm as early as 2005.  Press reports assert that some engineers knew of the problem in 2001.  Why wasn't management aware of these problems?  Why wasn't the board informed?  At the time of this writing, GM has recalled over 2.6 million cars costing more than $1.7 billion dollars. This doesn't begin to measure the cost of liabilities facing the firm, nor can it ever measure the human loss.  Why did it take so long to begin the recall?

It apparently would have cost about fifty seven cents to improve the switch.  Instead of doing so, the company tried makeshift solutions, shipping modified key inserts and writing to customers to be aware of hanging heavy objects from their keys.  When the part was finally improved, the company kept the same part number, providing further confusion.

The other solution the company took when at least some managers were made aware of the problem is to form two committees - not committees of the board - but committees of employees - and the board was never made aware of the situation.

To be fair, the current board is largely new, but it is not enough to say 'We weren't there.'  The board needs to understand if this is a systemic governance problem within the company.  They must assure themselves, as well as investors and customers that something like this could not happen again.  Those steps must begin with a thorough analysis of the process of risk management and the process by which the board is informed of problems.  

A dramatic audit of the firms governance structures is needed.  What governance structures led to this situation?  How must they be improved?  What was/is the process by which the board monitors product risk?   What whistleblower functions are in place and more importantly, what is the corporate culture with regards to reporting and addressing problems - even if they appear costly.

Moreover, it is not sufficient to make changes that could have prevented known problems.  The board needs to have a process for anticipating and eliminating future problems.  Again, this begins with having the right processes in place, and monitoring the corporate culture.  It begins with management developing the right tone for the firm and with the board continually probing and asking leading and open ended questions.  Board experience in working with other problems of risk management at other firms is essential, especially in pointing to weaknesses in current processes and in anticipating the unexpected.  

We'll know more about what happened soon as the firm has hired Anton Valukas to provide a detailed report on the situation.  Valukas was also the person who provided an analysis of the Lehman Brothers bankruptcy.  It should present a good start for reform and for recognition that safety of the customer has to be the highest priority.  Lack of safety is not an option.

All the best,


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