GM recall becomes case study in how bad news gets to the CEO

GM CEO Mary Barra apologized for the delay and has said she was informed on Jan. 31 of the recall.

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DETROIT (Bloomberg) -- When the late Robert Pritzker ran Marmon Group LLC, his family’s conglomerate, he gave the managers of its major units his phone number.

“He said, ‘If anything happens to imperil life, you call me, and you tell them to find me wherever I am,’” said Jim Schrager, a professor of entrepreneurship and strategy at the University of Chicago’s Booth School of Business, who worked at Marmon in the 1980s and dialed the number himself once, in the middle of the night.

“The CEO sets the tone,” Schrager said. “Wanting to find out is different than finding out.”

Such a response contrasts sharply with the picture that emerged this week as Mary Barra, the chief executive officer of General Motors Co., faced incredulity from Washington lawmakers over a deadly flaw that by GM’s account took more than a dozen years for the boss to hear about.

Lawmakers asked Barra, head of the country’s biggest automaker, why it took until 2014 for GM to recall some 2.6 million vehicles with a defective ignition switch linked to at least 13 deaths, when people inside the company had known about the flaw as early as 2001.

Barra, who became GM’s CEO in January, has apologized for the delay and has said she was told about an analysis of stalling cars in December and was informed on Jan. 31 of the decision by a GM committee to recall some cars with the faulty switch. She told lawmakers that from now on, she will be involved in recall decisions.

About time

It’s about time, said Sally Greenberg, president of the Washington-based National Consumers League.

“I’m just finding it very difficult to accept that the CEO wants to be removed from the process, or should be removed from the process -- or even is removed from the process,” said Greenberg, who also served as senior product safety counsel for Consumers Union.

Ever since Johnson & Johnson’s 1982 recall of tainted Tylenol laid down the blueprint for rapid-response crisis management, CEOs across several industries have demanded to know immediately about safety defects, product concerns or lawsuits, according to interviews with safety experts, management professors and current and former executives in several industries. That’s fundamental for maintaining a company’s reputation and its customers’ safety, these people said, and it’s up to the CEO to create a culture of speaking up.

“You have to set the expectation and then make people accountable,” said Harry Kraemer, who was the CEO of medical- device maker Baxter International Inc. for five years until 2004.

'Right thing'

At Baxter, with some 50,000 employees in 100 countries, Kraemer used weekly meetings and monthly newsletters to enforce a message of transparency and “doing the right thing,” he said. Raising red flags would be rewarded with promotions and companywide recognition, he told his charges, while not doing so could lead to a firing, which he said happened to senior-level executives during his tenure.

Baxter’s system for elevating potential life-threatening issues went into action in 2001, when media reports in Europe tied deaths in Spain to a kidney-dialysis filter made by a unit Baxter had purchased the previous year. The company pulled the products from Spain and then globally. Within a few weeks, Baxter’s investigation confirmed a defect in the filters that it believed could be linked to 51 deaths.

Kraemer decided to stop making the filters, close factories and take a writedown. Press reports at the time credited him for acting decisively even before it was clear the filter was at fault.

“Nobody likes bad news,” he said. ’’But I like bad news better than a surprise.’’

Target delays

Delays in identifying and addressing a potential problem left Target Corp. with a hit to its reputation and sales after hackers in December stole the credit-card details of tens of millions of customers.

The month before, Target security officials had received alerts about possible breaches of its computer system and determined they didn’t warrant a follow up, Target has said. It was federal law-enforcement officials who contacted executives about the issue on Dec. 12, according to congressional testimony. John Mulligan, Target’s chief financial officer, told lawmakers last month that the company is looking at how the hackers got in and probing how Target addressed the issue.

In the auto industry, there isn’t a standard practice for gauging the need for a recall. Auto executives typically don’t get involved, say people at the companies, in order to reduce any appearance of pressuring underlings to put the balance sheet ahead of customer safety.

Marchionne’s way

At Chrysler Group LLC, which is owned by Fiat S.p.A., the recall committee includes workers from the engineering, safety and legal departments, Fiat CEO Sergio Marchionne told reporters last month. Marchionne and other senior executives aren’t told about recalls until after they are issued, he said.

“It’s been designed on purpose to make sure that economic, financial or other reasons don’t impact those safety decisions and they’re done independently of us,” Marchionne said. “I want it that way.”

Other automakers, including Ford Motor Co. and BMW described similar processes in their U.S. operations, in which committees make decisions based on data and without interference from top executives. GM’s product chief Mark Reuss told reporters last month that it’s “not a healthy thing” to have senior managers involved.

GM’s shift

That shifted on April 1, when Barra told lawmakers that she and Reuss would now be reviewing recall decisions alongside the company’s technical community “to see if there’s more that we want to do.” GM declined to comment further yesterday.

Auto industry CEOs oversee businesses that churn out millions of vehicles, each made from thousands of parts from myriad suppliers -- a more complex process in some ways than pharmaceuticals, food, technology or child-care products. Cars are tweaked or redesigned each year. Recalls are common. At any given time, automakers face multiple liability suits and safety complaints in the U.S., where more than 32,000 people die on the highways each year.

Automakers’ longstanding approach to recall decisions could be an effort to shield company chiefs from responsibility or liability, said Greenberg and other safety experts.

“Are they deliberately setting up systems so they don’t know about it? Or do we need to view with some skepticism that they didn’t know about it?” said Allan Kam, an auto-safety consultant who retired in 2000 after 25 years as a senior enforcement attorney for the National Highway Traffic Safety Administration. “Either is deplorable. The buck stops with the CEO.”

Burning engines

At automakers outside the U.S., recall discussion can reach top managers swiftly.

The board of Porsche AG, a unit of Volkswagen AG, signed off last month on replacing motors in nearly 800 racing versions of its 911, after fires were reported in two of the engines in the model, the 2014 GT3.

“The CEO was informed very quickly,” said Achim Schneider, a Porsche AG spokesman. He and a VW spokesman both said there is no set process determining when such contacts are made.

Toyota Motor Corp. revamped its approach to dealing with and reporting vehicle defects following a recall of more than 10 million vehicles in 2009 and 2010 for defects that caused unintended acceleration. In 2010, the world’s largest automaker began allowing North American engineers to assess defects and determine when recalls were merited, rather than relying on Toyota City, Japan, to make that call.

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