The Price of the GM Recalls: Advice for Mary Barra

Mary-Barra

It is about as big a corporate crisis as anyone could imagine: a defective product that leads to deaths, denials and cover-ups, a sluggish corporate response to grieving families, and a government investigation that has raised its own questions of accountability. General Motors does not stand alone in the recall hall of shame, but a combination of its venerable brand and recent storyline — including a promising comeback from bankruptcy, now threatened — gives the revelations of the last few months a particularly powerful punch. What did GM know, who knew it and when?

As the wait for answers goes on, there is a company to run and a crisis to manage that could either cripple GM or empower it. Though several acts remain to be played out in this drama, experts in corporate governance and crisis management say that so far, GM and the woman in the hot seat, CEO Marry Barra, are doing a decent — but not stellar — job of managing the fallout.

“Mary Barra seems to fully embody the position of the CEO who is sorry. She recognizes that she has to pass on the [corporation’s] deepest regrets, and I think she’s been pretty convincing on that score,” says Wharton professor of legal studies and business ethics Amy Sepinwall. “Also notable, she wants us to understand that GM recognizes the error of its ways to the point where it’s not the same company in some meaningful sense. I think that is a powerful trope. We are inclined to forgive sinners when they have changed their character to the extent that it is almost a rupture in their identity.”

It’s a critical moment because the recall scandal comes just as GM was coming back to life, says David Vinjamuri, author of the book, Accidental Branding. “They had finally started to get the bankruptcy behind them, they have had some very well reviewed products … [and] they seemed to be firing on all cylinders,” he notes. “This is really a potential inflection point where they show that they are a company that can break the mold” in terms of how they handle a crisis, “or fall back into an old pattern.” That old pattern, Vinjamuri adds, would be choosing “to minimize the cost of the crisis rather than maximizing the value of the brand long term.”

GM has recalled 2.6 million cars, mostly Chevrolet Cobalts and Saturn Ions, after revelations that a faulty ignition switch could shut down the engine, lock steering and power breaks, and disable airbags. The flaw has been linked to at least 13 deaths. Barra, who took the helm at GM in January and is the first female CEO of a major international automaker, was called before Congress to explain why the company spent a decade doing nothing about the problem. In one particularly shameful case, GM had threatened to go after a victim’s family for legal fees if they did not drop a lawsuit against the automaker, The New York Times reported.

Echoes of Exploding Pintos

Lawrence G. Hrebiniak, emeritus professor of management at Wharton, points out that recalls, cover-ups and threatening behavior by GM carry some historical resonance. “If you look at the auto industry, they don’t come across as clear, decisive and positive. In 1965, Ralph Nader wrote Unsafe at Any Speed [which documented car manufacturers’ resistance to adopting safety equipment, such as seat belts]. The auto industry not only denied [these accusations], they went as far as digging up dirt on Nader rather than facing the problem head on,” he notes. “Nader won a ton of money in a judgment against GM. Shortly after that, there was the [controversy involving the Ford] Pinto and the exploding fuel tank. There is a history here.”

“Mary Barra seems to fully embody the position of the CEO who is sorry.” –Amy Sepinwall

In the case of the Pinto, in which a rear-impact collision could result in an exploding fuel tank, it was discovered that an $11 shield could have diminished risk. The more recent GM case centered on a 57-cent part inside the cars’ ignition switches. In both instances, it seems companies made a particularly cold-hearted calculation — that settlements to families of victims would cost less than a recall. “As consumers and concerned citizens, we think this is not the right way to proceed even if it turns out that the bottom line is enhanced by paying money out in liability payments,” says Sepinwall. “Liability of course never fully compensates the family for the loss that occurs. There is a moral cost to the tragedy, and there really is no price tag assigned to that.”

GM, however, will end up paying for its transgressions many times over, and, at least at this early stage, the Detroit-based automaker is doing many things right, according to veteran crisis management experts and observers. “I do have a lot of respect and admiration for [Barra],” says John Paul MacDuffie, a Wharton management professor and longtime auto industry researcher. “I think she probably is, more than anyone else within GM, the right person to get them out of this crisis.”

MacDuffie points out that Barra, a GM lifer, has real auto-industry credibility that other recent GM CEOs have lacked. “In several of her assignments before this, she was a voice for breaking from the old GM ways: [She worked] in manufacturing, in HR, in product development, and then [was appointed] CEO,” he notes. “In a company where a lot of CEOs came up through the financial side, she came up through the car side.” This means Barra has the potential for changing, in reality and perception, GM’s reputation for emphasizing cost cutting above all else, MacDuffie adds.

Hrebiniak, however, thinks Barra could be presenting a stronger, more positive case for the company. “I feel sorry for her. She is stepping into a mess,” he says. “But she is just not offering positives and not fighting some of the charges strongly enough.” Barra could have said, for instance, that starting this summer, all of GM’s cars will come with 4G technology that will automatically communicate more early-warning mechanical problems directly to the company, Hrebiniak suggests.

Still, some metrics show that GM’s image is holding up in spite of the controversy. March figures for the automaker’s U.S. sales showed a 4.1% year-to-year increase. Boston-based social media analytics firm Crimson Hexagon examined several million Twitter messages with the terms “GM” and “recall” sent between February 7 and April 1, well into coverage of the scandal. It shows 42% neutral tweets and 58% negative ones.

Tweets sorted simply for mention of GM brands overall did not show significantly negative drift as the scandal unfolded, Crimson Hexagon found. Between January 1 and February 7, 3.7 million tweets about GM and its sub-brands were 26% positive, 71% neutral and 3% negative. From February 7 to April 1, 5.3 million Tweets showed up as 24% positive, 72% neutral and 4% negative. “At the brand level, we don’t actually see much difference between the two time periods, which suggests that the recalls aren’t hurting the brand overall,” says Crimson Hexagon’s Elizabeth B. Breese, senior content and digital marketing strategist.

But these samplings dipped into public sentiment just as Barra’s testimony before Congress was getting underway on April 1 and 2. Days later, Saturday Night Live led off its weekly broadcast with a spoof on Barra’s performance, showing her trying to roll her chair out of hearings in a comically evasive routine.

“Knowing people are looking askance at the fox guarding the henhouse, they should invite someone from the outside … who can sit with the committee and examine the data.” Lawrence Hrebiniak

Meanwhile, the National Highway Traffic Safety Administration (NHTSA) yesterday levied a $28,000 fine on GM because of what it said was the company’s failure to provide information the government had requested about the recall. That information had been due on April 3, according to press reports. At the same time, the NHTSA itself is under investigation by a congressional committee for what some allege was its delayed response to complaints from consumers about the ignition switch.

The Buzz in Competitors’ Showrooms

“You can bet salesmen in Ford, Honda and Kia showrooms, and the dozens of other competitors GM has, are making comments, and those comments are going to have some impact,” states Gene Grabowski, senior strategist at public relations/crisis management firm Levick.

Furthermore, GM has a significant disadvantage compared to the gold standard in crisis management. In 1982, a 12-year-old girl in Elk Grove Village, Ill., became the first victim of cyanide-laced extra-strength Tylenol capsules. Seven people died in that product tampering case, and the culprit was never caught. Johnson & Johnson responded almost immediately with a massive recall: 31 million bottles as part of a total effort costing well over $100 million. The financial losses, however, were only short-term. Market share recovered after a year, and the company emerged as a hero. How did they do it? “They said the value of life was a lot more important than the business case. This was quick, decisive and wonderful action,” says Hrebiniak.

A strategy of this kind, however, requires that the entire organization focus on the long-term reputation and health of the company. Says Vinjamuri: “The instinct of a large corporation is self-preservation, and at a large public company, the CEO tends to be judged by market valuation in the short term. The decisions [then-J&J CEO James E. Burke] made are not the ones the in-house counsel and CFO are going to tell [a CEO] to do today because it potentially has a very big, immediate and unknown financial liability when you admit liability and actively recall.”

GM, which has more than 200,000 employees around the world, also lacks one key advantage that Tylenol had — an outside perpetrator as culprit, rather than what is now perceived as inside callousness. Tylenol was responding to a crime committed by someone else. On the other hand, GM perhaps has an advantage in that J&J did not have a woman as CEO. “As a speculative matter, I might say that compassion sounds more genuine coming from a woman,” says Sepinwall, who carries the thought one step further: “I would be really troubled if the board of directors saw this was coming down the pike [while choosing a new leader] and felt it would be better to have a woman as CEO.”

According to Grabowski, Barra did a “credible” job in front of Congress, although he points out that one goal of such hearings is for politicians to gain points for being tough. She missed an important messaging opportunity by bringing the staff with her that she did, he adds. “There are these older white men all around her, and as she is speaking about the new GM, these old white guys are scowling. The optics were wrong. I was very surprised that, in 2014, they would have missed something as obvious as that.”

“The instinct of a large corporation is self-preservation, and at a large public company, the CEO tends to be judged by market valuation in the short term.” –David Vinjamuri

What Barra did do, though, is bring news — something seemingly concrete — for the media to put in their headlines and in the leads of their stories: She announced that GM had engaged Kenneth Feinberg, who specializes in administering disaster funds to victims, although she did not offer anything specific about whether GM will establish such a fund.

“That’s what we teach people to do who go before a hearing – to have a bold stroke, because that way you can report something rather than getting beat up, and it gives people on the panel a reason to praise you,” says Grabowski. “You make an announcement, you show a full page ad of something you are doing, or you form a new blue ribbon panel.”

Barra has been criticized for not revealing all the facts of what led to the problems with the cars. “I heard a lot of ‘we’re-investigating-it,’ but I didn’t get a lot of real answers,” one father of a victim told The New York Times. But there are likely legal reasons for not saying more. “It’s so easy to sit on the sidelines and judge people under these pressure situations,” Grabowski notes. “In nearly every case I have seen, the best you can do is emerge from the crisis with an understanding among consumers that you managed the crisis as best you could.”

To be in business in the 21st century, he adds, “is to live in crisis — consumers understand that. If the company manages this crisis well, there is a good opportunity to build its GM brand in the future. Companies have done this. They can leverage the crisis as a positive for their reputation.”

Undoing Wrongs by Doing Good

Projecting the right message and actually doing the right thing are usually one and the same. Making sure this kind of scandal never happens again means changing the prevailing corporate culture, says Eric W. Orts, a Wharton professor of legal studies and business ethics. “What you need to do is look at the actual incentive structure. If someone raises a significant safety issue, you need to reward [that person] for making an ethical decision even though it’s going to cost the company a little bit of money.”

A system that ensures anonymity within the company for reporting problems can also help, he notes. And although this would represent a major change, companies could consider restoring a responsible corporate officer doctrine, which would make members of the corporate board financially — and even criminally — liable for events that happen on their watch. “We don’t have that in the law right now, but it would certainly change the board’s attitude,” Orts points out. “You have this view that has taken over the world — if all a corporation should do is maximize value, then that’s what you are going to get.”

Experts say GM is moving in the right direction in some areas, such as meeting with families of victims and hiring Feinberg. The company has also brought aboard crisis management veteran Jeff Eller for advice. But there are other options open to the company that will help determine whether this ends up being a major collision, or just a particularly nasty speed bump. GM is conducting an internal investigation, but such endeavors may not carry much credibility if not handled correctly.

“There are these older white men all around [Barra], and as she is speaking about the new GM, these old white guys are scowling.” –Gene Grabowski

“Knowing people are looking askance at the fox guarding the henhouse, they should invite someone from the outside … who can sit with the committee and examine the data,” Hrebiniak says. “There needs to be a perception of legitimacy, that it’s not a cover-up. Structurally, it would be good to turn around and add one or two people to the committee who are outsiders.” The team is currently being led by Tony Valukas, chairman of law firm Jenner & Block and a former U.S. Attorney, and by GM’s own general counsel, Michael Millikin.

GM has indicated that although it may be shielded from liability for actions that occurred before its 2009 bankruptcy, it could choose to compensate all victims and their families. That is a potentially powerful action, according to Vinjamuri. “The most loyal customer isn’t someone who never had a problem,” he notes. “It is the person who had a problem who was surprised with a solution that exceeded [his or her] expectations. So the crisis represents an opportunity.” GM should be compensating pre-bankruptcy victims, he adds, “because it is the right thing to do [and] people will remember it.”

GM could find a different way to compensate victims, something with a more altruistic ring to it than just paying out cash, adds Sepinwall: “Sometimes companies will have scholarship funds, or in Philip Morris’s case, have public service messages aimed at discouraging kids from smoking — some effort that seeks to do good beyond the most immediate costs of the wrong-doing.”

The company might also take a page from Toyota, notes MacDuffie. Faced with product flaws, Toyota began in 2009 a series of recalls — so many, in fact, that it may have started to have a paradoxical effect on public perception. “There was a time when recalls had negative associations,” MacDuffie says. “But Toyota decided to get in front of potential recalls, and for a while it seemed there was a new Toyota recall every few weeks. In the end, there may have been some desensitizing, some reframing of what this means, that if Toyota is doing a recall, that’s a good thing.” Toyota also arranged to keep service centers open later and compensated those businesses for doing so – moves that meant a lot to dealers and customers, MacDuffie adds. “To anyone from the outside, it was a sign that Toyota was taking it seriously.” Toyota on April 9 announced that it was recalling more than six million vehicles worldwide for five different defects that impact 27 different Toyota models, in addition to the company-built Pontiac Vibe and Suburu Trezia. No deaths or crashes have been linked to the defects, the company said, but at least two fires were found to be related to a defective starter.

Of course, putting things right does not ensure brand value in perpetuity. For all the praise Tylenol garnered after the 1982 recall, it received just as much criticism more recently after a moldy smell turned out to emanate from rogue substances mixing with Tylenol in manufacturing plants, causing nausea, stomach pain and other health problems. Several rounds of recalls followed. “We have young children,” says Vinjamuri, “and a lot of parents say they don’t trust Tylenol. It was unthinkable that anyone would have said that 10 years ago.”

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