Bloomberg News

GM Fine Eclipsed by Unprecedented Oversight of Its Words, Deeds

May 17, 2014

GM CEO Mary Barra

Mary Barra, chief executive officer of General Motors Co., left, arrives to testify at a House Energy and Commerce Committee hearing in Washington, D.C., on April 1, 2014. Photographer: Pete Marovich/Bloomberg

General Motors Co. (GM:US) won’t be able to extricate itself from regulatory troubles stemming from its recall of 2.59 million small cars by writing the U.S. government a check.

Apart from the record $35 million fine, which amounts to less than two hours’ worth of GM’s projected 2014 revenue, the Detroit automaker yesterday agreed to oversight by the U.S. National Highway Traffic Safety Administration down to what phrasing to avoid in safety communications and who must attend certain meetings.

The agreement overlays efforts by GM Chief Executive Officer Mary Barra to overhaul the company’s bureaucracy to make sure safety issues get elevated more quickly. By making some of the changes legally binding, the agreement may give Barra more leverage to shake up a GM culture that, before the company’s U.S. bailout, often prized cost savings above other considerations.

“Today’s announcement by the Department of Transportation is a statement that new rules are being enforced by the new sheriff,” said Eric Ibara, senior analyst for Kelley Blue Book, the Irvine, California-based automotive information service.

NHTSA has been investigating why it took the largest U.S. automaker years to address engineering concerns and consumer complaints about engine stalling in Chevrolet Cobalts and other small cars dating from 2004. At least 13 fatalities have been linked to the defect, which can deactivate air bags.

GM has said heavy key rings or jarring can cause ignition switches on some cars to slip out of the “on” position, cutting off power and deactivating air bags.

Training Lingo

The company’s shares (GM:US) dropped more than 1 percent to $34 yesterday. They have declined 16.8 percent this year.

GM agreed to meet NHTSA on a monthly basis to go over company changes and send Jeff Boyer, its vice president of global vehicle safety, “absent compelling circumstances.”

GM also promised to review its changed organizational structure with the safety agency and “promptly respond” to feedback. It agreed to meet with NHTSA monthly for a least a year -- longer if the agency requests -- to discuss non-public technical service bulletins, warranty claims and field reports that may indicate emerging safety defects.

The agreement even requires GM to change the lingo it uses in training employees, by disavowing wording diluting the urgency of potential safety defects. NHTSA attached to its order a 48-page presentation the company used in 2008 to help workers avoid language that could imply a condition might be dangerous.

TV Test

One slide lists 69 words to avoid in presentations and reports, ranging from “defect” to “Hindenburg.”

“For anything you say or do, ask yourself how you would react if it was reported in a major newspaper or on television,” the presentation instructed.

GM’s training materials “explicitly discouraged” employees from using words like “defect, dangerous, safety related and many more essential terms for engineers and investigators to clearly communicate up the chain when they suspect a problem,” NHTSA Acting Administrator David Friedman said yesterday in Washington.

The actions of NHTSA, which twice elected not to begin defect investigations of the Cobalt and Saturn Ion, are being probed separately by the Department of Transportation’s inspector general.

Not everyone believes the agency’s agreement with GM will bring about lasting changes. Forcing GM to park affected vehicles would have been a bigger deterrent, said Robert Hilliard, a Corpus Christi, Texas-based attorney representing families who are suing GM over the recall.

‘Artificial Woodshed’

“Today was just a show,” Hilliard said in an interview. “It was taking GM to an artificial woodshed and pretending as if GM will now become responsible.”

The agreement also will continue to drain the regulator’s limited resources to make sure GM complies with its promises, said Clarence Ditlow, executive director of the Center for Auto Safety, a Washington-based advocacy group.

“It shouldn’t be necessary to toilet-train GM to obey the law,” Ditlow said. “I’m not sure NHTSA has the resources to do this.”

GM said it has begun working with the agency to review processes and policies to avoid future recalls of this nature.

“We have learned a great deal from this recall,” Barra said in a statement. “We will now focus on the goal of becoming an industry leader in safety. We will emerge from this situation a stronger company.”

Systemic Issues

GM hasn’t fully complied with a request by NHTSA to answer 107 questions related to the recall. Since April 3, the company has been accruing fines of $7,000 per day. GM said it was waiting for an internal investigation to be completed before answering some of NHTSA’s questions.

The fines will continue until the request is filled, Friedman said. GM is still obligated to comply under the new legal agreement.

While Friedman said he didn’t have any records of Barra being briefed on the ignition-switch issues, other company executives and employees were aware: Some were notified by a supplier in 2009, and by 2012 communication among the automaker’s staff was “very explicit about an unreasonable risk to safety.”

GM’s slow reactions to safety risks were systemic throughout the company, from its organization to the sharing of information, Friedman said.

Largest Fine

“GM engineers knew about the defect, GM investigators knew about the defect, GM lawyers knew about the defect, but GM did not act to protect Americans from that defect,” Friedman said. “The fact that GM took so long to report this defect says something was very wrong with the company’s values.”

The $35 million fine is the largest paid by a U.S. automaker for delays in issuing a safety recall. Ford Motor Co. and Toyota Motor Corp. (7203) previously paid $17.4 million, the maximum allowable at the time.

Congress has since changed the maximum NHTSA fine to $35 million. Regulators are pushing lawmakers to approve fines of as much as $300 million for a bigger deterrent effect, the Transportation Department said.

The fine wasn’t “nearly enough for misconduct of this magnitude,” said Senator Claire McCaskill, who presided over an April 2 hearing about the recall. The Missouri Democrat pledged to hold another hearing and to look at legislation that could change the way NHTSA handles defect investigations.

“Congress must consider raising or eliminating the cap on civil penalties when automakers put lives at risk,” McCaskill said in a statement. “I remain concerned that GM employees appear to have engaged in criminal behavior concealing this defect.”

To contact the reporters on this story: Jeff Plungis in Washington at jplungis@bloomberg.net; Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net Michael Shepard


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