Bloomberg News

Lawmakers Question Barra’s Ability to Change GM’s Culture

June 18, 2014

GM CEO Mary Barra

Mary Barra, chief executive officer of General Motors Co., testifies at a U.S. House Subcommittee on Oversight and Investigations hearing in Washington, D.C., on June 18, 2014. Photographer: Pete Marovich/Bloomberg

General Motors Co. (GM:US) Chief Executive Officer Mary Barra faced a sometimes hostile House subcommittee who grilled her for almost three hours on the slow recall of faulty ignition switches and whether GM’s culture can change.

Representative Tim Murphy, a Pennsylvania Republican, questioned whether the Detroit-based automaker could be sufficiently changed simply by dismissing 15 people from among its more than 200,000 employees. Fred Upton, a Michigan Republican, suggested that an internal report overlooked stalling-related safety concerns in other models, such as Impala large cars recalled this week. Diana DeGette, a Colorado Democrat, wouldn’t let Barra elaborate on an answer.

“The report absolves previous CEOs, the legal department, Ms. Barra, and the GM Board from knowing about the tragedy beforehand,” DeGette said. “But that is nothing to be proud of. That the most senior GM executives may not have known about a defect that caused more than a dozen deaths is, frankly, alarming.”

In Barra’s first interaction with Congress since the release this month of the internal company investigation on the ignition switch, lawmakers made clear many questions remained. They sought to determine whether there was a corporate cover-up at GM, while looking to establish if more safety defects exist in GM cars on the road today. They also questioned how completely the largest U.S. automaker will go in compensating victims of ignition-switch related crashes.

No Rest

“I know some of you are wondering about my commitment to solve deep, underlying cultural problems uncovered in this report,” Barra told the committee. “The answer is I will not rest until these problems are resolved. As I told our employees, I am not afraid of the truth. And I am not going to accept business as usual at GM.”

Barra returned to Congress 11 weeks after a hearing in which she failed to satisfy some lawmakers about why GM didn’t act sooner to fix a defective ignition switch linked to 13 deaths. The report this month showed engineers knew about the flaw for more than a decade, though corrective action was stymied by a pattern of incompetence and neglect. Anton Valukas, the former U.S. attorney hired by GM to lead the internal investigation, appeared with Barra before the panel today.

GM shares (GM:US) and sales have held up despite the publicity surrounding the recalls. The company in May had its best month of U.S. auto sales since August 2008, rising 13 percent to 284,694 vehicles. In April, it reported first-quarter net income, despite $1.3 billion in recall-related costs.

Sales Gains

GM placed the most models atop one of the auto industry’s most closely watched new-car quality studies today, with its Chevrolet Malibu besting the Toyota Camry.

The automaker won six model segments, the most of any automaker, in J.D. Power & Associates’ annual Initial Quality Study released today. Three of GM’s four U.S. brands ranked above industry-average quality and its top-selling Chevy lineup placed sixth overall, trailing only Hyundai and Toyota among mainstream brands.

Those gains suggest consumers are separating new models on the lot from the older small cars that are part of the ignition-switch recall.

GM fell 0.2 percent at $36.30 at close in New York. The shares have risen 2.1 percent since Feb. 12, the day before the first batch of ignition-related recalls was formally announced.

Of 24 analysts (GM:US) who evaluate GM tracked by Bloomberg, only 3 have negative recommendations for investors.

Troubling E-Mail

Upton, chairman of the House Energy and Commerce Committee, read from a 2005 e-mail from a GM employee he identified as an engineer, who took an Impala on a test drive and experienced stalling. Laura Andres described hitting a pothole at 45 miles per hour and the car shutting off. That would be a big concern to any customer on Interstate 75 in rush-hour traffic with kids in the back seat, Andres said.

“I think this is a serious safety problem, especially if this switch is on multiple programs,” Andres said. “I’m thinking big recall.”

GM declined to identify Andres’s position with the company.

“We encourage our employees to speak up for safety, and an issue like the one described in the memo is something that today we would respond to immediately,” Jim Cain, a GM spokesman, said in an e-mail.

In the e-mail, Andres said that a GM technician told her that other drivers had complained about a similar issue with the Pontiac Solstice.

Ray DeGiorgio

Ray DeGiorgio, who was named in an internal report released this month as being responsible for the faulty ignition switch in cars recalled in February and was one of the 15 fired, was included in the e-mail chain. He responded that Impala’s switch is completely different than the one in the Solstice. He said he recently drove the Impala and “did not experience this condition.”

DeGiorgio’s job, in 1999, was to lead a team designing an ignition switch for GM’s next generation of small cars. The Valukas report found that DeGiorgio signed off changes to the part and didn’t properly change the part number. This effectively hid the change later for engineers trying to fix problems in the future.

During one exchange, Kathy Castor, a Democrat from Florida, said that DeGiorgio told the committee during an interview that he had no idea the basis for GM’s new requirement for a higher torque specification for the ignition switch.

Barra responded that the specification were tested extensively.

“But certainly that would raise a concern if your former engineers continue to have concerns over the fix,” Castor said.

Barra questioned whether the former employee can be believed.

‘Painfully Clear’

“I don’t find Mr. DeGiorgio credible. And I’ve personally reviewed the testing that’s been done by very experienced, seasoned engineers and I am confident that the right validation has been done of the system in the vehicle.”

The Impala was recalled two days ago, Upton noted and Barra confirmed. The document suggests employees within GM did consider engine stalling to be a serious safety issue, contrary to the findings of the company’s internal report, Upton said.

“The recall announced on Monday makes it painfully clear this is not just a Cobalt problem,” Upton said. “A culture that allowed safety problems to fester for years will be hard to change. But if GM is going to recover and regain the public’s trust, it must learn from this report and break the patterns that led to this unimaginable systemic breakdown.”

Fear Factor

Valukas and Barra faced questions about a Bloomberg Businessweek story about a GM employee named Courtland Kelley who sought whistle-blower protection in a Michigan court around when the Cobalt’s problems were gestating. Kelley claimed he’d been retaliated against for pushing for safety recalls on other vehicles. His case was dismissed and GM argued he wasn’t hurt because he was still employed by the company. Yesterday, GM said it plans to re-examine his claims as part of its efforts to redouble its review of safety of its vehicles.

Kelley’s successor as a quality manager for compact cars told Valukas’s investigators that he was reluctant to push back on safety concerns after seeing what happened to Kelley.

Murphy, the Pennsylvania representative, said said in a Bloomberg Television interview that it was a disturbing to hear an employee working on the Cobalt was “afraid to speak up because of that retaliation approach, so we’ll have to see if that really changes.”

The automaker has received a draft protocol for a victim-compensation fund that is being circulated, Barra said. The fund is being headed by Kenneth Feinberg, who determined payouts after the 9/11 terrorist attacks.

Wrist Slap

The $35 million civil penalty GM agreed to pay the National Highway Traffic Safety Administration -- the maximum allowed under current law -- is a “slap on the wrist” for a company whose net income approached $4 billion last year, said Representative Jan Schakowsky. GM reported profit of $3.77 billion attributable to common stockholders, while net income was $5.35 billion.

Congress should pass legislation that removes the cap on penalties the government can impose on an automaker that ignores a safety-related defect, the Illinois Democrat said.

GM has recalled a record 20 million vehicles in North America for various fixes so far this year, more than double the number of cars and trucks it sold worldwide last year. The spate of recalls largely began in February when the company said it would replace faulty ignition switches in small cars, including the Chevrolet Cobalt and Saturn Ion.

The biggest U.S. automaker has initiated two new ignition recalls in the past week unrelated to the action to fix the Cobalt, Ion and four other U.S. models. On June 16, it recalled 3.36 million vehicles, including some model years of the Chevy Impala and Cadillac Deville, because their ignitions could slip out of the “run” position.

Repair Delays

Valukas, the former U.S. attorney hired by GM to lead the internal investigation, said the automaker needs to view federal safety regulators as partners, not adversaries. He reiterated findings from his report about how GM’s engineering and legal departments failed to connect the dots and move quickly enough on the main recall.

“I understand that while this report answers many questions, it leaves open others.”

Lawmakers repeatedly pressed Valukas on whether he was able to conduct a truly independent investigation. Representative Bruce Braley, an Iowa Democrat, noted the report says on the title page it is an attorney-client work product.

GM has shipped 396,253 repair kits globally, and dealers have repaired 154,731 of the 2.59 million small cars covered by the recall, according to a memo released by congressional investigators. An additional production line will begin making replacement parts in a week, Barra said.

About 9 million of the 20 million GM cars recalled this year were for ignition-related issues such as switches, cylinders and keys.

“In many ways, the facts surrounding what finally resulted in the GM recall are far more troubling than a cover-up,” Murphy said. “GM engineers and attorneys who were given the facts -- including reports on stalls and air-bag malfunctions -- who were tasked with figuring out what went wrong -- didn’t connect the dots.”

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

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net Niamh Ring


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