The consequences of GM’s product safety failures are now becoming tangible. It will recall more cars this year than it will sell, affecting almost every one of its models. Kenneth Feinberg, an attorney best known for dispute resolution in cases of terrorism and corporate accidents, will be distributing a minimum of $1 million to each of the families of victims. And although the company’s share price has nearly regained its pre-crisis level, performance has lagged both its competitors and the market as a whole.
No proof has emerged that GM knew that faulty ignition switches were endangering customer lives, even though the defect has been tied to 13 deaths and has spurred a wave of consumer lawsuits since February. However, a comprehensive report by the law firm Jenner & Block exposed the cultural and management problems that failed to identify and mitigate risk to vehicle safety.
For investors evaluating companies, it is difficult to identify these intangible qualities in advance of a negative event. However, the structure of a firm’s governance and management can signal whether the company is well-prepared to anticipate and prevent crises. While no set of questions can definitively identify potential operational failures in advance, the right questions can help raise concerns about a company’s governance. Here are five critical ones that should have been asked:
1) Has the Board explicitly identified and defined its key strategic risks?
In 2002, at about the time the defect in the Chevy Cobalt first appeared, a former head of the corporate quality audit wrote a letter to the GM board detailing his concerns about vehicles being produced with serious safety defects. Yet, for more than a decade after receiving the letter, the Jenner report makes clear that the board never made safety a strategic area of focus.
Instead, the board addressed safety under several broader focus areas, including reputation management, government relations and quality. While safety may have been important to individual board members, the structure and function of the board’s responsibilities did not explicitly make safety a priority.
2) Which committee oversees the management of these risks?
For the first time in 2014, GM created an Operational Risk Committee with oversight responsibility for safety. Previously, responsibility was diffused among the board and committees. The full board oversaw the company’s relations with rating agencies such as JD Power and Associates, a key source of customer satisfaction scores and safety information for consumers. The Public Affairs committee had oversight of safety from the point of view of “reputation and regulation,” but not operational risk. And the audit committee, among its various duties, received the quality audit from management that included safety.
The lack of a clear line of responsibility makes it easy for each committee to implicitly or explicitly assume that someone else was handling the most difficult questions. In fact, as the report notes, comprehensive information about safety problems or recalls was never included in board discussions.
3) Does the committee have the expertise and capacity to provide proper oversight?
Audit committees’ oversight of financial compliance and internal controls is an enormous task that requires substantial capacity and expertise. GM, like some other companies, also added enterprise risk management under the audit committee function.
The Jenner report seemed to indicate that GM’s audit committee provided only superficial oversight of its quality program, with little emphasis on safety. Although “quality” was listed as a strategic risk for the company, over a several year period the audit committee discussed no safety concerns, other than those related to lithium ion batteries, according to the Jenner report.
4) How is management held accountable for these risks?
The “GM Salute,” a well-reported phenomenon identified in the Jenner report, involves “a crossing of the arms and pointing outwards toward others, indicating that the responsibility belongs to someone else, not me.” The “GM salute” has been described in the media as a dysfunctional aspect of GM’s culture, something that is difficult to discern from the outside.
However, just as the board’s structure failed to provide a clear focal point for oversight of safety, management also lacked clear lines of accountability. At the global level, multiple managers reported to the board on safety issues, among many others. Within divisions, draconian headcount reductions added safety and other tasks to the responsibilities of overworked managers.
The new position of Vice President of Global Vehicle Safety consolidates these responsibilities, and will be successful only if there is clear direct and indirect accountability from the divisions to this position. Additionally, the responsibilities of the various quality and safety groups within the company must be harmonized, and the new position be directly accountable to the Operational Risk Committee.
5) How does the Board benefit from external perspectives on these risks?
In 2007 and possibly earlier, external researchers had determined that the Cobalt’s airbags were likely to fail during a “moving stall” caused by the faulty ignition switch. Other researchers had also been pursuing similar lines of inquiry. Yet GM’s engineers did not make this connection for several years, having classified the moving stall problem as a “lower-priority” customer convenience issue, rather than a critical safety issue.
Engagement with outside stakeholders is critical to effective corporate governance. While it may not always be the responsibility of the board to interact directly with external stakeholders, obtaining these perspectives is important to avoid “groupthink.” What’s more, treating safety as a factor valued by many but a priority to none left the door open to costly mistakes. Had GM’s board members been aware of these findings, it may have led to more critical questioning of management assumptions about the quality of its products.
John Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group and an Adjunct Assistant Professor at Columbia Business School.