Prairie View A & M Ethical Culture and Legal Liability Article Reaction Paper Not to exceed 5 sheets of paper front and back (meaning 6-10 single pages ) (include footnotes of sources).The goal is to show me that you read the assignment. Please don’t write something about the general topic; but fail to show me that you actually read the assigned article. THIS VERSION MAY CONTAIN INACCURATE OR INCOMPLETE PAGE
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ARTICLE
ETHICAL CULTURE AND LEGAL LIABILITY: THE GM
SWITCH CRISIS AND LESSONS IN GOVERNANCE
MARIANNE JENNINGS* & LAWRENCE J. TRAUTMAN**
During 2014 news stories emerged that eventually revealed and caused General Motors (GM) to admit that the corporation took more than ten years to
recall millions of vehicles because of an elaborate cover-up related to defects in
its engine ignition switches. Beyond the tragedy of at least 100 deaths attributed
to the ignition switch failures, the company’s internal failure to address and
timely disclose what was a material event evident in the earliest stages of the
use of the switch and clear evidence of the company’s awareness of the defects
is appalling. Within the past fifteen years there have been significant examples
of ethical lapses, all with the common factor that the evolution of the lapses
within the companies took place over a period of time with many in the organization aware of the growing problems. The ignition switch problem at GM follows this same pattern. The purpose of this article is to examine the GM ignition
switch debacle in light of its culture and past practices and search for insights
to aid other companies in how to detect these material events and decisions in
their early stages. First, we discuss what went wrong at GM, including findings
from the report conducted by attorney Anton Valukas at the request of GM’s
board. Second, we explore GM’s several appearances before Congress due to
this ignition switch safety issue. Third, we look at what GM has done so far.
Fourth, we provide thoughts about what GM needs to do in the future. Next, we
discuss lessons learned from this ethical crisis. Finally, we conclude and offer
Electronic copy available at: https://ssrn.com/abstract=2691536
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advice. We believe this paper offers a recital of the facts surrounding an egregious lapse in U.S. corporate ethical conduct as it provides constructive
thoughts about future prevention of the causal management conduct, failure of
corporate governance and regulatory oversight. The GM experience offers
many lessons about the importance of organizational integrity, “truth telling”
at all levels within large corporations, and the costs and issues that result when
there are failures in corporate governance.
TABLE OF CONTENTS
I. OVERVIEW ……………………………………………………………………………… 189
II. WHAT WENT WRONG AT GENERAL MOTORS? …………………………… 190
A. Historical Importance of General Motors ……………………….. 190
III. THE SAFETY HISTORY AT GM ………………………………………………… 192
A. GM’s History of Problem Cars………………………………………. 192
1. The Corvair…………………………………………………………… 192
2. The Chevrolet Malibu…………………………………………….. 193
3. The Cobalt Ignition Switch……………………………………… 195
B. Moral Dilemma of Safety at General Motors …………………… 198
C. The “Recall” ………………………………………………………………. 199
D. Valukas Report and GM Internal Investigation ……………….. 201
IV. CONFRONTATION WITH CONGRESS ………………………………………….. 211
V. WHAT GM HAS DONE…………………………………………………………….. 212
A. The GM Code of Ethics: General Content……………………….. 212
B. GM’s Code Addressing “Speaking Up” ………………………….. 213
VI. WHAT GM NEEDS TO DO ………………………………………………………. 217
A. Pervasive Culture of Problem Denial/Avoidance ……………… 219
B. “Don’t Take Notes” & Careful What You Write ………………. 220
C. The GM Structural Barriers ………………………………………….. 221
D. Possible Motivations for the Cobalt Behaviors ………………… 222
E. Fear and Silence: The Institutional Failure to Share
Knowledge ……………………………………………………………….. 222
F. The Information and Cultural Silo Problem …………………….. 224
G. Criminal Probe Begins …………………………………………………. 224
H. Focus on Legal Ethics ………………………………………………….. 225
1. Perjury …………………………………………………………………. 225
2. Conflict of Interest …………………………………………………. 225
I. Implied Motives: What About Compensation? ………………….. 226
J. Failure of Information Flow to the GM Board………………….. 227
VII. CRIMINAL CHARGES AND THE SETTLEMENT ……………………………. 229
VIII. LESSONS LEARNED……………………………………………………………… 231
A. Information Leaders Need to Know About Their Culture Is Not
Getting to Them ………………………………………………………… 233
B. Fixing the Culture: Understanding CEO Perception, and
Information Needs …………………………………………………….. 234
IX. CONCLUSION AND ADVICE …………………………………………………….. 236
Electronic copy available at: https://ssrn.com/abstract=2691536
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I. OVERVIEW
“There are only two types of companies. Those who have experienced an
ethical lapse and those who are not aware that they are in the development
stage for one.”1
During 2014 news stories emerged that eventually revealed and caused General Motors (GM) to admit that the corporation took more than ten years to recall
millions of vehicles because of an elaborate cover-up related to defects in its
engine ignition switches.2 Beyond the tragedy of at least 100 deaths attributed
to the ignition switch failures,3 the company’s internal failure to address and
timely disclose what was a material event, even in the earliest stages of the use
of the switch and clear evidence of the company’s awareness of the defects became clear. Within the past fifteen years there have been multiple significant
examples of corporate ethical lapses.4 All these ethical crises evolved over a
1
Marianne M. Jennings, paraphrasing FBI Director James Comey in his description of
cyber attacks, “There are two kinds of big companies in the United States. There are those
who’ve been hacked . . . and those who don’t know they’ve been hacked.” Riley Walters,
Persistent Cyberattacks of U.S. Companies on the Rise, WASHINGTON TIMES (Nov. 3, 2014),
http://www.washingtontimes.com/news/2014/nov/3/riley-walters-persistent-cyberattackson-us-compan/ [https://perma.cc/9SLR-BQPK].
2 Jeff Bennett, U.S. Fines GM for Missing Deadline, WALL ST. J., Apr. 9, 2014, at B1
(reporting that GM has failed to answer about one-third of the 107 questions asked by the
National Highway Traffic Safety Administration a month earlier). When we make reference
to GM prior to July 10, 2009, our reference is to General Motors Corporation. General Motors
Corporation filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for
the Southern District of New York on June 1, 2009. The sale of all of the assets of General
Motors Corporation to an entity that became known as General Motors Company received
court approval on July 5, 2009, with subsequent sale closing on July 10, 2009. Accordingly,
when we reference GM from and after July 10, 2009, we are referring to the purchaser of the
assets, General Motors Company. See also General Motors Company, Filing with SEC of
Amendment No. 8 to Form S-1 Registration Statement, About this Prospectus, i (Nov. 16,
2010).
3 Christopher M. Matthews & Mike Spector, GM Likely to Face Criminal Charges, WALL
ST. J., May 26, 2015, at B1.
4 For a full discussion of the evolving issues at companies such as Enron, WorldCom, and
Adelphia and the resulting federal regulation, see Marianne M. Jennings, A Primer on Enron:
Lessons From A Perfect Storm of Financial Reporting, Corporate Governance and Ethical
Culture Failures, 39 CAL. W. L. REV. 163 (2003), and for details on WorldCom and Tyco, see
Marianne M. Jennings, Restoring Ethical Gumption in the Corporation: A Federalist Paper
on Corporate Governance – Restoration of Active Virtue in the Corporate Structure to Curb
the “Yeehaw Culture” in Organizations, 3 WYO. L. REV. 387 (2003).
Electronic copy available at: https://ssrn.com/abstract=2691536
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prolonged period of time, with many within the organization aware of the growing problems. The ignition switch issue at GM follows the same pattern. The
purpose of this article is to examine the GM ignition switch debacle in light of
GM’s culture and past practices and search for insights to aid other companies
in how to detect these material events and decisions in their early stages.
First, we discuss what went wrong at GM, including findings from the report
conducted by attorney Anton Valukas at the request of GM’s board. Second, we
explore GM’s several appearances before Congress due to this ignition switch
safety issue. Third, we look at what GM is reported to have done so far. Fourth,
we provide thoughts about what GM needs to do in the future. Next, we discuss
lessons learned from this ethical crisis. Finally, we conclude and offer advice.
We believe this paper offers a recital of the facts surrounding an egregious lapse
in U.S. corporate ethical conduct and provides constructive thoughts about future prevention of the causal management conduct, failure of corporate governance and regulatory oversight. The GM experience offers many lessons about
the importance of organizational integrity, “truth telling” at all levels within
large corporations, and the costs and issues that result when there are failures in
corporate governance.
II. WHAT WENT WRONG AT GENERAL MOTORS?
By the summer of 2015, deaths attributed to GM’s faulty ignition switch problem had risen to more than 100.5 On September 17, 2015, criminal charges were
announced against GM that resulted in a deferred prosecution agreement and a
$900 million forfeiture.6 In announcing the agreement with GM, the head of the
Manhattan U.S. Attorney’s Office, Preet Bharara, explained why criminal
charges were necessary for GM and other companies: “‘The first line of defense
is self-policing within the company. The second is regulators,’ . . . ‘When all
those things have failed, prosecutors come along with the blunt hammer. That
does get some attention in the Board room.’”7 The criminal charges and deferred
prosecution for GM were a long time in coming and an examination of GM’s
history indicates why the first line of defense failed.
A. Historical Importance of General Motors
General Motors was founded in Flint, Michigan on September 16, 1908 by
William “Billy” Durant.8 GM’s worldwide sales of 9.9 million vehicles for the
5
See Matthews & Spector, supra note 3, at B1.
Press Release, U.S. Department of Justice, U.S. Attorney of the Southern District of
New York Announces Criminal Charges Against General Motors and Deferred Prosecution
Agreement With $900 Million Forfeiture (Sept. 17, 2015), http://www.justice.gov/opa/pr/usattorney-southern-district-new-york-announces-criminal-charges-against-general-motorsand [https://perma.cc/LD95-CYGM].
7 Matthews & Spector, supra note 3, at B5.
8 The Editors of Encyclopedia Britannica, General Motors (GM) American Company. in
ENCYCLOPEDIA BRITANNICA, http://www.britannica.com/topic/General-Motors-Corporation
6
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year ended December 31, 2014, mean that GM’s market share is the largest estimated “market share in North America and South America, the number six
market share in Europe and the number two market share in the Asia Pacific,
Middle East and Africa region.”9 During this same period, the Asia Pacific, Middle East and Africa regions accounted for 44.1% of GM’s global retail vehicle
sales.10 Because of its market presence and now worldwide brand, GM President
Charles Wilson, during his 1953 confirmation hearings to become secretary of
defense, reportedly said he believed “‘what was good for the country was good
for General Motors and vice versa.’ (Soon that would be simplified to: ‘What’s
good for General Motors is good for the country.’)”11 Mr. Wilson was prescient
and his statement has gone through iterations to a description of GM’s role in
the U.S. economy: as GM goes, so goes the nation.12 GM was suffering in 2008
when U.S. financial markets collapsed.13 Both the financial markets and GM
recovered through combinations of bankruptcy reorganization and government
assistance.
Sales of automobiles have constituted one of the historical engines powering
job creation and economic growth in the United States. Perhaps GM’s role in the
foundation of the U.S. economy and increasingly intertwined relationship with
the federal government has provided cover for an ethical culture that has grown
sloppy and dysfunctional over the years. Because the global financial melt-down
and credit crisis of 2008-09 resulted in GM’s critical shortage of operating cash,
it “received a bridge loan from the U.S. Treasury, under the conditions that the
company further accelerate a tough restructuring of its [U.S.] operations that had
been underway for several years.”14 Corporate turnaround expert Jay Alix observes, “By the time the company closed its books on 2008 it would be in the
red by a staggering $30.9 billion.”15
[https://perma.cc/EH8Q-R3QA]; General Motors Company, Company: History and Heritage, Creation: 1897-1909, GENERAL MOTORS, http://www.gm.com/company/historyAndHeritage/creation.html [https://perma.cc/QJL3-HXGP].
9 General Motors Company, Annual Report (Form 10-K) at 6, 10 (Feb. 4, 2015),
https://www.sec.gov/Archives/edgar/data/1467858/000146785815000036/gm201410k.htm
[https://perma.cc/M7SP-XBMZ]. See also Vivek Ghosal & Jiayao Ni, Competition and Innovation in Automobile Markets (CESifo Working Paper Series No. 5504, 2015)
http://ssrn.com/abstract=2669394 [https://perma.cc/TJJ6-7573].
10 GM Form 10-K, supra note 10. at 10.
11 TomDispatch, As GM Goes, So Goes. . ., THE NATION (Feb. 23, 2009), http://www.thenation.com/blog/gm-goes-so-goes [https://perma.cc/G82R-NTSY].
12 Liz Robbins, As Warren Buffett Goes, So Goes . . ., N.Y. TIMES: THE LEDE (Feb. 28,
2009, 2:24 PM), http://thelede.blogs.nytimes.com/2009/02/28/as-warren-buffett-goes-sogoes/?_r=0 [https://perma.cc/B9AA-UN89].
13 Innovation and Challenges: 2000-2008, GENERAL MOTORS, (last visited Feb. 25, 2016),
http://www.gmchina.com/gm/en/aboutGM/GMGlobal/historyandheritage/innovation_challenges [https://perma.cc/N5NJ-XZUX].
14 Id.
15 Jay Alix, How General Motors Was Really Saved: The Untold True Story of The Most
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III. THE SAFETY HISTORY AT GM
A. GM’s History of Problem Cars
1. The Corvair
The GM ignition problem is not, as the saying goes, GM’s “first rodeo” when
it comes to safety issues with its vehicle design. Ralph Nader began his career
as a consumer advocate with his book, Unsafe at Any Speed, which documented
the safety and design issues with GM’s rear-engine Corvair.16 The Corvair was
first sold in 1959, with questions about the car’s stability arising almost immediately as drivers lost control of their cars, spinning off roadways backwards,
crashes which often ended in rollover accidents.17 EMPI, an accessory company,
began selling stability packages for Corvairs almost immediately after the first
Corvair sales began.18 By October 1965, GM was facing over 100 lawsuits that
alleged that the instability of the Corvair had resulted in accidents.19 In that era
of cat-and-mouse discovery, GM was able to withhold the data about the car’s
testing and/or settle the cases so as to preserve the GM brand.20 GM defended
itself, claiming “it’s all about the nut behind the wheel,” and at least two juries
believed that the crashes were attributable to driver negligence and did not hold
GM liable.21 GM also had the benefit of time on its side.22 With each passing
year, there were fewer and fewer Corvairs on the road with fewer opportunities
for drivers to explore causation through litigation.23
Each year also brought more public disclosures and analysis of the car’s
safety. In 1963, sports car racer and writer, Denise McCluggage, wrote about the
“handling idiosyncrasies” of the Corvair and number of accidents.24 She also
noted that Corvairs involved in accidents were likely to have back-end damage
with no evidence of the cars traveling in reverse gear or being hit from behind.25
Also in 1963, EMPI’s stability package was praised in a Sports Illustrated article
Important Bankruptcy in U.S. History, FORBES (Oct. 30, 2013, 6:10 AM),
http://www.forbes.com/sites/danbigman/2013/10/30/how-general-motors-was-really-savedthe-untold-true-story-of-the-most-important-bankruptcy-in-u-s-history/
[https://perma.cc/Q6K9-YZ6R].
16 RALPH NADER, UNSAFE AT ANY SPEED: THE DESIGNED-IN DANGERS OF THE AMERICAN
AUTOMOBILE (1965).
17 Id. at 9-10.
18 Id. at 11.
19 Id. at 9.
20 See id. at 8-10.
21 Id. at 9.
22 Id.
23 Id.
24 Id. at 10.
25 Id.
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for its ability “to reduce oversteer and smooth out the unstable rear-end breakaway.”26 Mr. Nader concluded that the GM engineers “did not have the professional stamina to defend their engineering principles from the predatory clutches
of the cost-cutters and stylists.”27 By 1963, GM had received hundreds of complaints about the Corvair and the problems from the rear-end axle swing.28 The
problem was one an engineering professor said could be solved by any engineering student, but the company, while taking action to correct the problem for its
1964-65 models, did not issue a recall, notify existing owners, or offer a disclosure about the issue.29
Dr. Seymour Charles, a GM shareholder and founder of Physicians for Automotive Safety, raised questions about the Corvair to both GM’s chairman and
president.30 In his pleading he urged GM to consider a recall for the Corvairs
still on the highway.31 Even Motor Trends’ technical editor had noted the number of Corvairs in the wrecking yards.32 Yet, the president of GM, John F. Gordon, seemed to be unaware of the problem despite the litigation and despite his
presiding, since 1958, over GM’s introduction of this novel vehicle design.33
Evidently Mr. Gordon had not reviewed or followed the Corvair’s introduction,
engineering policy approval, or subsequent sales, complaints, and accidents. The
president of GM somehow remained ignorant of the ongoing objections and
analysis of the Corvair’s problems in everything from Sports Illustrated to M…
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