General Motors: Safety On Board

34 (2014, 3 July). Corporate Governance Issues Present Opportunities For ETI - Albert
Essien. The Ghanaian Times. Retrieved from http://www.ghanaiantimes.com.gh/
corporate-governance-issues-present-opportunities-for-eti-albert-essien/

35 Ecobank Group Annual Report 2013. Page 15.

36 Gassesse, J. (2014, 1 July). Ecobank: Emmanuel Ikazoboh Appointed Chairman.

Africa Top Success. Retrieved from http://www.africatopsuccess.com/
en/2014/07/01/ecobank-emmanuel-ikazoboh-appointed-chairman/

37 (2014, 2 October). South Africa's Nedbank to Take Ecobank Stake for $493 Million,
Reuters. Retrieved from http://www.reuters.com/article/2014/10/02/us-eti-m-a-
nedbank-grp-idUSKCNOHR1E120141002
Case overview
Investigations relating to vehicular safety sparked off a series of General Motors
38 Bonorchis, R & Wallace, P. (2015, 3 June). Ecobank May End Battle With Ex-CEO
Tanoh Through Settlement. Bloomberg Business. Retrieved from http://www. (GM) product recalls in early 2014. While product recalls are common in the U.S.,
bloomberg.com/news/articles/2015-06-03/ecobank-says-it-may-end-fight-with- the fact that the defect had been known to GM for more than a decade prior to the
ex-ceo-tanoh-in-settlement recalls raises serious concerns over the company’s management practices. There
were questions about the prior connections of directors with GM and number of
39 Sponsor Wire. (2015, 1 June). Ecobank Group CEO Named African Banker of the
Year. All Africa. Retrieved from http://allafrica.com/stories/201506012362.html years served by some of the directors. Diversity of the board of directors was also
seen to be poor. The objective of this case is to allow a discussion of corporate
governance issues relating to board composition; culture and tone at the top; as
well as the role of regulators.

Where the engine started

Based in Detroit, Michigan, General Motors (GM) is a multinational corporation with
operations worldwide. The company is one of the world leaders in the automotive,
transportation products and related services industries’.

This is the abridged version of a case prepared by Ang Zheng Ting Justin, Chua Ming Wei Gabriel, Lee
Ying Mao Eugene, Ng Hui Li Phyllis, Zhang Zhenjie Justin under the supervision of Professor Mak Yuen
Teen. The case was developed from published sources solely for class discussion and is not intended
to serve as illustrations of effective or ineffective management or governance. The interpretations and
perspectives in this case are not necessarily those of the organisations named in the case, or any of
their directors or employees. This abridged version was edited by Lim Hui Ying under the supervision of
Professor Mak Yuen Teen.

Copyright © 2015 Mak Yuen Teen and CPA Australia.

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 General Motors: Safety On Board

Founded in the U.S., the company underwent rapid global expansion and is Smith had been a director of the company since 1990. From 1992 to 2000, Smith
currently producing vehicles in 37 countries, under various brands such as Opel held the position of CEO and Wagoner was the CFO. Smith then became the
and Chevrolet. At its peak, GM dominated more than half of the U.S. market and Chairman of the Board and Wagoner became the President as well as the CEO.
had led global vehicle sales for 77 years since 19312. GM was also an industry In 2003, Wagoner took over as the Chairman of the Board and hence became the
leader known for its innovation in car safety. In 1971, GM was the first company company’s CEO, President, and Chairman of the Board.
to introduce an airbag system in its cars, which was a significant milestone in the
car production history. Today, the airbag system is a mandatory safety feature in A Case of Rusty Gears?
all automobiles®.
GM's Board had five different committees — Audit Committee, Directors and
Corporate Governance Committee, Executive Compensation Committee,
Investment Funds Committee and Public Policy Committee. Each committee was
Manoeuvring the road blocks chaired by a different independent director, except for the Audit Committee and
In 2009, due to recession and poor credit markets caused by the U.S. financial Investment Fund Committee which were both chaired by Eckhard Pfeiffer’.
crisis, GM was forced into bankruptcy. The American government provided the
company with a bailout which saw federal taxpayers owning 60% of the company*, Some of the directors had been sitting on the Board for more than 10 years, with
However, the condition for the bailout was for GM to undergo heavy restructuring some having prior connections to GM. For instance, E. Stanley O'Neal worked
to make the company competitive again. As a result, Rick Wagoner, the Chairman for GM as a treasury analyst, and was under the company’s scholarship while
and CEO, was forced to resign from the Board under governmental threat of pursuing his MBA™,
withholding bailout money?®.
More than half of the 13 independent directors had worked with Wagoner since
In 2010, the company announced the largest initial public offering (IPO) at that he joined the Board in 1998. As of 2008, eight of the independent directors had
time, raising US$20.1 billion, which reflected public sentiment and strong investor worked with Wagoner since he was appointed as the Chairman of the Board
confidence®, GM also posted the highest monthly sales since September 2008 in in 2003. Most of the directors were of similar age and had similar working
May 2013 and June 201378, experiences, especially those who had served the longest on the Board?®.

In December 2013, the U.S. Treasury Department sold off its remaining shares in
GM, marking the end of U.S. taxpayer ownership in the company?®.
Hitting road bumps
However, in February 2014, results from investigations revealed that there were “I'm truly sorry for your loss,” said Mary Barra, the present CEO of GM at a meeting
past safety lapses in GM vehicles. This prompted the first of its many recalls and with the victims’ families on 31 March 201476, Barra had been appointed CEO in
the problems appeared to date back to 2001. January 2014. Her words were meant to comfort the families of those who had
lost their lives due to the faulty mechanisms in GM manufactured vehicles, or more
specifically, the Chevrolet Cobalts. At that time, it was confirmed that an ignition
switch fault had caused at least 31 crashes and 13 deaths’.
The gears that drove the motor
Back in 2001, the Board of Directors in GM consisted of 14 directors, including
John F. Smith, Jr. and G. Richard Wagoner, Jr. who held executive positions in the
company.

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 General Motors: Safety On Board

Yet, the defect issue did not arise during Barra’s time as CEO. In fact, the problem In March 2007, the NHTSA informed GM of the issues regarding Amber Rose's
dated back to more than a decade ago in 2001. During the pre-production testing death, but neither GM nor the safety regulator launched any formal investigation.
of the Saturn lon, GM detected an ignition switch defect which automatically Investigations of another fatal crash involving a Chevrolet Cobalt linked the accident
turned off the car engine and prevented the airbag from deploying. This issue was to the ignition switch defect, but again, the safety regulator did not conduct any
seemingly resolved when a service technician closed the inquiry in 2003, after further investigation,
changing the key rings and noting that the problem was fixed'®,
In September 2007, an investigation was recommended by the NHTSA to its
In 2004, the defect resurfaced when GM replaced the Chevrolet Cavalier with Office of Defects Investigation (ODI) to look into the failed deployment of airbags
the Cobalt. A new inquiry was launched by GM engineers to address this issue. in the crashes of Chevrolet Cobalts and Saturn lons. However, the ODI concluded
However, the proposal to fix the problem was rejected, with the reason that it was that there was no correlation between the crashes and the failure of airbags to
too costly and time-consuming. GM also rejected another proposal by one of its deploy. This was because the investigation team had an outdated perception of
engineers to redesign the key head'®. the airbag’s functionality and assumed that the airbags were operating normally
under the given road conditions?*. Hence, NHTSA deemed the investigation
A year later, an ignition switch engineer advised that due to the fragility of the unwarranted and ended the proposed probe prematurely. This proposal was
switch, further changes to the switch would result in mechanical and/or electrical raised by NHTSA again in 2010 but ODI again decided against it and dismissed
problems. The case was again closed with no action taken. High costs, lead time the matter.
and uncertainty of success were cited as reasons for not proceeding with any
change. An official of Delphi, who supplied the switches, had also once mentioned
that the ignition switch torque was below the original specifications set by GM
Repair and maintenance
during the sample testing stage. GM nevertheless approved that part®,
It was later found in an investigation led by an external engineering firm engaged
The ignition switch defect claimed its first fatality in July 2005 when 16-year-old by GM that the defect in the switch accounted for at least 13 lives lost in 31
Amber Rose crashed into a tree in her Chevrolet Cobalt. Later that year, GM accidents?®. In response, a decade after it first identified the problem, GM initiated
issued a technical service bulletin alerting dealers of the potenti tion switch a series of recalls on 7 February 2014, starting with about 800,000 Chevrolet
problem, but no recall was announced. As these bulletins were non-public and Cobalt and Pontiac G5 vehicles. Just three weeks later, GM added about
directed only at car dealers, general consumers were oblivious to such an issue?'. 600,000 Chevrolet HHR, Pontiac Solstice, Saturn lon and Saturn Sky vehicles to
the list of vehicles to be recalled. In March, another 824,000 cars sold in the U.S.
from 2008 to 2011 were added into the recall list. In less than two months, GM
had recalled a total of 2.6 million small cars due to the faulty ignition switches?
The traffic police Together with other unrelated recalls, by mid-2014, a total of 28 million cars had
With the unfolding of problems in GM, actions of the regulator also came under been recalled®.
scrutiny.

The National Highway Traffic Safety Administration (NHTSA) is responsible for

reducing the frequency and intensity of casualties from motor accidents through
public education, as well as enforcing safety performance standards of vehicular
components and investigating safety defects. It is also responsible for rating motor
vehicles for safety performance?,

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 General Motors: Safety On Board

Barra takes the wheel With the death toll exceeding 100, GM has set up a fund that to compensate
victims of crashes caused by the faulty switches and has fixed about 70% of the
Barra’s immediate challenge was to steer GM out of the myriad of poor publicity and cars recalled®. The company has also paid a record US$35 million ci
civil actions against the company. In response to public criticism over the recalls, 2014 and signed a consent order acknowledging its failure to notify the regulators
Barra committed the company to an internal review and sought the assistance of in a timely manner of the defect, as required under federal law®”. GM has also gone
external legal firms. The internal investigations led to the dismissal of 15 employees outside the company to hire a new general counsel, Craig Glidden, who “has had
as well as disciplinary action against five others?®. Among those dismissed were a distinguished career managing complex legal issues around the world, and his
Michael J. Robinson, the vice president for global regulatory affairs, and William broad legal and senior management expertise was said to fit perfectly with GM's
Kemp, the top lawyer who oversaw product-related litigation®. However, the strategic priorities and plans for global growth”,
blame was largely pinned on the “incompetent” lower-level employees, while the
top executives were largely untouched?®', Barra and her top lieutenants, including While GM may be taking some positive steps in handling the problem, there is still
Michael Millikin, the General Counsel who led the internal probe, were cleared of much that needs to be done in order for the company to return to its former glory.
any wrongdoings in the recall. The internal report was criticised by Senator Richard Barra has stated GM's intention to do “the right thing”, but it remains to be seen
Blumenthal, Democrat of Connecticut, to have “absolved upper management, if merely fixing the mistakes of the past can rescue the company from the ditch
denied deliberate wrongdoing and dismissed corporate culpability”? On top of the that it has driven itself into. Nevertheless, GM is no stranger to recovering from
internal actions taken by GM, the Justice Department stepped in to investigate the dire situations, and its resilience would be necessary to survive the current crisis.
delays surrounding the recalls. GM was eventually fined US$35 million in civil penalty
for its inadequacy in handling the recalls®. With the help of Kenneth Feinberg, a
specialist attorney in victim compensation, GM announced a minimum offer of US$1
million to the families of those who died due to the defective GM vehicles. Discussion questions
1. Discuss the possible corporate governance issues relating to GM's Board
Call for Employees to Sound the Horn of Directors and how it could have contributed to GM’s problems. To what
extent should the Board of Directors be held responsible for the safety
In April 2014, Barra launched the “Speak Up for Safety” programme to encourage issues? Explain.
employees to find innovative solutions to enhance the safety performance standards
of GM vehicles. On top of this problem-solving approach, the programme also 2. In the 1990s and early 2000s, GM had a practice promoting the CEO to
attempts to remove conversational barriers between employees and their leaders Chairman when a new CEO was appointed. What are the pros and cons of
to encourage employees to voice concerns over safety-related issues®. such a practice?

3. What do GM's actions prior to the recall suggest about the company’s
culture at that time? Discuss the extent to which the culture at GM could
Steering back on track have contributed to its problems.

The Manhattan U.S. attorney's office has determined GM to have broken the law 4. How effective were the regulators in discharging their duty? Due to the
and will likely extract a fine exceeding US$1 billion from the company. GM will either bailout, many classified GM as “Government Motors”. How might this have
plead guilty or enter into a deferred-prosecution agreement. With the company influenced the regulators in performing their duties?
set to face criminal charges, the Federal prosecutors are considering if charges
against individual employees are necessary to spur changes in the auto industry,
which had never been faced with criminal cases related to product defects®.

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 General Motors: Safety On Board

5. Given the long-established corporate culture in GM, can the introduction of 11 General Motors. (2014). 2001-2003 Annual Report. Detroit, Michigan.
the “Speak up for Safety” programme achieve its intended objectives? How
12 pid.
can a company transform its culture?
13 jbid,
6. How adequate were Mary Barra's actions in handling the crisis and taking
corrective steps to prevent future occurrences of such problems? Is there 14 bid.
anything that she should have done differently? Explain. 15 jbid,
16 Muller, J. (2014, May 28). Exclusive: Inside New CEO Mary Barra’s Urgent
Mission To Fix GM. Forbes. Retrieved from hitp://www.forbes.com/sites/joan-
nmuller/2014/05/28/exclusive-inside-mary-barras-urgent-mission-to-fix-gm/
Endnotes
1 General Motors. (2014, January 1). About GM: Our Company. Retrieved from 17 Basu, T. (2014, March 31). Timeline: A History of GM's Ignition Switch Defect.
http://www.gm.com/company/aboutGM/our company.html National Public Radio. Retrieved from http://www.npr.org/2014/03/31/297158876/

2 The New York Times. G.M.’s Road from Prosperity to Crisis. (2012, Decem-
ber 19). Retrieved from htp:
ness/20090531 GM TIMELINE.html

3 Company: History and Heritage. (2014, January 1). General Motors. Retrieved from
http://www.gm.com/company/historyAndHeritage/revolution.html 20 Cowan, R., Beech, E., & Lienert, P. (2014, March 30). Delphi Told Panel GM Ap-
proved Ignition Switches Below Specifications. Reuters. Retrieved from http://www,
4 Welch, D. (2009, June 1). GM Files for Bankruptcy. Bloomberg. Retrieved from reuters.com/article/2014/03/30/us-gm-recall-congress-idUSBREA2TOHO20140330
http://www. businessweek. com/stories/2009-06- 01/ m-files-for- bankruptcybusi-

&
Basu, T. (2014, March 31). Timeline: A History of GM's Ignition Switch Defect.
National Public Radio. Retrieved from http://www.npr.ora/2014/03/31/297158876/
5 King, N. & Stoll, J. (2009, March 30). Government Forces Out Wagoner at GM.
The Wall Street Journal. Retrieved from http://online.wsj.com/articles/SB123836090

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6 Baldwin, C., & Kim, S. (2010, November 17). GM IPO raises $20.1 billion. Reuters. Do
Retrieved from http://www.reuters.com/article/2010/11/17/us-gm-ipo-idUSTRE-
@

2 Basu, T. (2014, March 31). Timeline: A History of GM’s Ignition Switch Defect.
6AB43H20101117
National Public Radio. Retrieved from http://www.npr.org/2014/03/31/297158876/
7 General Motors. (2013, June 3). GM Reports its Highest Monthly Sales Since timeline-a-history-of-gms-ignition-switch-defect
September 2008. Retrieved from hitp://media.gm.com/content/dam/Media/gm-
24 U.S. House of Representatives Committee on Energy and Commerce Chairman
Fred Upton. (2014, September 16). Staff Report on the GM Ignition Switch Recall:
8 General Motors. (2013, July 2). GM Reports its Highest Monthly Sales Since Review of NHTSA The Oversight Series, Accountability to the American People. Re-
September 2008. Retrieved from http://media.am.com/content/dam/Media/gm- trieved from htt //ener commerce.house.gov/sites/re| ublicans.ener
com/investor/2013/2013-June-Sales/June-Sales-Release. pdf

2 Higgins, T., Katz, I., & Klimasinska, K. (2013, December 10). GM Bailout Ends as 25 Basu, T. (2014, March 31). Timeline: A History of GM's Ignition Switch Defect.
U.S. Sells Last of ‘Government Motors’. Bloomberg. Retrieved from_http://www. National Public Radio. Retrieved from http://www.npr.org/2014/03/31/297158876/
bloomberg.com/news/2013-12-09/gm-bailout-ends-as-u-s-sells-last-of-govern-
ment-motors-.html

10 Dapena, P,, & Yellin, T. (2014). GM: Steps to a Recall Nightmare. CNN Money.
Retrieved from http://money.cnn.com/infographic/pf/autos/gm-recall-timeline/

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