General Motors’ Lesson to Manufacturers: Transparency Is a Better Risk Reduction Strategy

Posted by on Monday, April 14th, 2014

General Motors learns transparency is the best risk management policy.

General Motors learns transparency is the best risk management policy.
Image courtesy of Flickr user MDGovpics

General Motors Corp. has been through the wringer, we all know. The company narrowly escaped annihilation during the recent recession and appeared to be recovering, but a painful risk reduction and management failure may be undoing all the company’s hard work. Instead of taking on a manufacturing failure head on, the company hid information and now has to pay a steep price.

Many Names for One Big Failure

GlobalRiskInsights.com’s Stephen Slezak called the problem a “strategic failure that materialized from a seemingly ‘low probability’ event.” The U.S. Justice Department is calling it a criminal violation, looking into G.M.’s failure to inform consumers about a vehicle defect that cost at least 13 lives. G.M. faces a cost of $300 million to recall 3.1 million vehicles. Another billion or so may come from the Justice Department investigation.

I’m sure CFO Magazine is regretting its 2013 analysis of G.M.’s risk reduction program when it said, “If any company can be said to have put the ‘enterprise’ in risk management, it’s G.M.” That statement came from a lack of understanding of what went on inside G.M. The company had already survived a recession that should have destroyed it and was suffering from the “too big to fail” mentality.

The company’s former Chairman and CEO, Dan Akerson, said in 2012, “Large, complex, global organizations…don’t fail with one dumb decision. There has to be many, cascading decisions that accumulate to erode your competitive position.” But it was a single unwise decision that led to this glaring risk management failure.

Hidden Problems Don’t Stay Hidden

According to the New York Times, G.M. knew there was a serious problem with its ignition systems for some time. Strange accidents had been happening since 2005, but not all of them pointed clearly to ignition system problems. But by 2009, it was obvious that a problem was brewing with their low-end models. That’s just about the same time that the company filed for bankruptcy. CNN detailed the events of that year, noting that the federal government poured 19.4 billion into the company to try to save it, and then another 30 million to keep it going while it restructured.

NPR.org’s Tanya Basu presented a revealing timeline of events related to the recalls. G.M. likely believed it would be off the hook for these ignition failures from the restructuring. When the company finally initiated the recall in February 2014, the affected model years ranged from 2005 through 2007. Surely, prior to the recall, the company believed it had fixed the problem and gotten away without incident. After all, two previous investigations from the National Highway Traffic and Safety Administration (NHTSA) had been dropped. It was only after a G.M. engineer testified in June 2013 about G.M.’s knowledge of the problem that the company and the federal government took the issue seriously.

The Snowball Effect

G.M. didn’t tell the bankruptcy court about this problem. So now, on top of the damaged reputation, costs of recall, and potential federal fines, the company faces likely charges of bankruptcy fraud. The court had no opportunity to extend liability for the ignition problems to the restructured company.

One would think all this would teach G.M. a lesson. And at first, it appeared that it did. The company’s new CEO Mary Barra, installed in Jan. 2014, promised to correct the problems of the “old G.M.” and be transparent in the company’s dealings with consumers and government. She even initiated the recall of model years 2008 through 2011 because the faulty switches may have been used in repairs on those vehicles.

But Time’s Sam Frizell reported this week that the company faces $7,000 a day in fines from the NHTSA for failing to answer more than one-third of the 107 questions the agency requested. It doesn’t help that the Center for Auto Safety called out to the NHTSA in a March 2014 letter, citing a marked increase in these types of deaths since the release of vehicles using the faulty ignition system. The letter points to 303 front seat deaths in which air bags in G.M. vehicles from Chevy Saturn and Cobalt model years 2003 – 2007 did not deploy.

Mary Barra Testifies to Congressional Committee on Hidden Defects
 

Transparency Is the Only Good Decision

Obviously, trade secrets need to remain secrets, but when it comes to safety, companies must bite the bullet and step forward. Had G.M. come clean about the problem when it was first discovered, the following costs would never have materialized:

  • Recalls in 2008 to 2011 model year vehicles – G.M. wouldn’t have still been using the faulty ignition module in its parts supply business.
  • $28,000 (and counting) fees from the NHTSA for failing to provide requested information.
  • Potential fines of $1.2 billion or more (Toyota was recently fined this much for hiding defects)
  • Untold damage to the company’s reputation – the “New G.M.” idea won’t fly anymore.

Although owning up to an error like this would have been costly for G.M. at a critical time, the eventual cost has been much greater. The public can understand a mistake and will often forgive one if given fair treatment. What the public will not tolerate is an intentional withholding of information that resulted in the deaths of at least 13 people and possibly as many as 303.

Transparency Is a Smarter and Cheaper Risk Reduction Approach

Owen-Dunn urges manufacturers to learn from G.M.’s lesson. Effective risk management means looking at the big picture—all of the potential costs of a given strategy. Product defects that affect consumer safety are much more costly to manage when hidden from the public. The smarter and cheaper solution – not to mention, the most ethical choice – is to come clean about mistakes and fix them as swiftly as possible, while offering full transparency in the process.

Owen-Dunn is a trusted advisor on risk, benefits and insurance to clients of all sizes and across all industries. Our passion is creating intelligent, flexible coverage solutions for both captive and traditional insurance clients. Contact us today or join us at one of our events!

3 responses to “General Motors’ Lesson to Manufacturers: Transparency Is a Better Risk Reduction Strategy”

  1. […] brings raises the level of transparency needed in your advertising up to a much higher point (and let’s face it, that’s what social […]

  2. […] Owen-Dunn, we’re impressed with what Elon Musk has done. Unlike General Motors’ recent gaffes when public scrutiny fell on the company, Musk immediately stood up and stated the facts. Talk to […]

  3. […] perform. It will take many months before we see the level of compensation offered to victims. GM needs more transparency and it needs to make the process easier for victims before the next firestorm hits. Otherwise, it […]

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