Could increased individual employee liability help counter corporate malpractice?

In March 2010, Ben and Beth Melton took a phone call that is a parent’s worst nightmare. Their 29-year-old daughter Brooke lay dying in a hospital with a broken neck after her Chevrolet Cobalt spun out of control on a rainy Georgia night, crashed into another car and landed in a ditch. It was Brooke’s birthday, but she would not survive the night.

Her 2005 Cobalt was among the 2.3m cars GM has recalled in 2014 for problems with ignition switches. The company has disclosed that it knew as early as 2001 that switches could be bumped into the “accessory” position, shutting down the engine and power steering, and leaving the airbags unable to deploy in a crash.

During testimony for a lawsuit they filed against GM, the Meltons learned that the carmaker had come up with a fix years ago that would have limited some ignition shut-off incidents, but had made a “business decision” not to implement it.

There are 13 deaths – some allege more – now linked to this defect. The full facts will emerge as court proceedings unfold.

There is still a lot we do not know about who at GM may be at fault – and there is a persuasive argument that US federal officials have some accountability for the disastrous sequence of decisions that led to a multi-year delay in fixing the faulty 90 cent part that caused the ignition problem.

Why did GM or US safety officials, who pore over accident reports and warranty claims in search of patterns, fail to pick up on Cobalt’s problems?

The answer in part is that the crashes linked to the ignition switch are concentrated in cars made between 2003 and 2006. By 2007, GM had changed the ignition part, but the engineer who ordered the fix didn’t assign a new number to the replacement part. That’s almost certainly why recall experts inside the company and federal safety authorities twice reviewed crash data but found no “discernible pattern” and didn’t recommend a recall.

Corporate cover-up?

Did the engineer just screw up, with catastrophic consequences, or was this part of a company cover-up? GM has suspended the engineer and a supervisor as part of its internal probe but otherwise has remained silent on this issue.

It may be tactless to raise this but the US government may be, albeit inadvertently, complicit in a more political way. The Cobalt was only made to meet fuel mileage targets, which require companies to sell high-mileage cars, even if they are unprofitable, to balance out sales of SUVs and trucks.

The Cobalt was federally mandated junk on wheels, and a money pit. Is it too cynical to ask whether a company would be more willing to issue a recall for a problem with in a profitable car rather than for a flimsy part in a financial black hole designed to be cheap?

Whoever is at fault, GM will pay dearly for its lapses.

GM has already taken a $750m charge against earnings. And today’s shareholders, who are shouldering the loss of billions of dollars as the stock sags, will also absorb the costs of future fines and settlements.

A class action suit has been filed by lawyers who are hoping to break open the company’s 2009 bankruptcy agreement, which protects the “old GM” from any liabilities, including from car victims, that occurred in cars sold before its reorganisation. GM has filed a motion to block the class action and uphold its reorganisation agreement with the federal government.

GM’s public relations nightmare and a regulatory push by safety officials have put the fear of God into auto executives. Although the actions are not related, GM, Chrysler, Ford, BMW, Fiat, Toyota and Volkswagen have recently announced recalls totalling 15m vehicles worldwide spread over more than 30 models for a variety of safety concerns. US, China, South Korea and Japanese regulators are all stepping up enforcement efforts, levelling stiff fines and in some case launching criminal probes.

“The car companies are trying to recall proactively before there is a negative backlash,” Jessica Caldwell, an analyst at, a car-shopping website, told the Wall Street Journal.

Who benefits?

The ugly mess also starkly highlights the double standards when it comes to executive pay. How much did the decision not to issue a recall, criminal or not, add to company profits and contribute to its executives’ pay over the years?

They won’t be forced to cough up past pay, that’s certain. GM’s compensation policies require recovery of bonuses in only a few circumstances, mostly related to accounting, but not for unethical behaviour that imperils customers or the company’s reputation.

The GM case might provide a powerful platform for arguing for a rethink of clawback provisions. There was movement in that direction after the accounting frauds at Enron and WorldCom in the early 2000s, but the subsequent Sarbanes-Oxley legislation ended up focusing more narrowly on top executives’ incentives and financial reporting requirements.

But as the GM case highlights, malpractice with possible criminal consequences can occur at all levels in a corporation, from the engineering floor to the C-suite.

Even before the current fiasco, activist investors were battling for the kind of changes in accountability that might have altered the disastrous decisions at GM.

Last year, LongView Funds wrangled changes from two pharmaceutical companies. Amgen now considers “serious financial or reputational damage to the company” when determining cash incentive awards for staff, while Pfizer can cancel awards if an employee “engages in misconduct that is detrimental to the company”.

Public officials are also embracing aggressive tactics. Earlier this year, New York City Comptroller Scott Stringer, overseer of five municipal public employee funds with assets of $140bn, successfully negotiated expanded thresholds for employee clawbacks at four companies: Allergan, Halliburton, Northrop Grumman and United Technologies.

Recoveries can be sought from a broader array of executives and not only for intentional misconduct and gross negligence, but also for an action that causes significant financial or reputational harm to the institution – if they were made aware of it but then did not properly monitor subordinates.

“Misconduct that causes financial or reputational harm is significant,” Stringer said in an interview with the New York Times. “We’re actually getting companies to adopt clawback policies that are meaningful.”

Which brings us back to the debacle at GM. The company is conducting an internal review that will also address compensation for victims’ families who are technically not in a position to collect wrongful death settlements because of legal protections conferred by the creation of a “New General Motors” in July 2009 after its forced bankruptcy.

It is not clear if GM will make the review public, or if the public, shareholders and families of the victims will ever get to know who made what decisions when. An even bigger question perhaps is whether public outrage will blow back on the rest of corporate America.

A recent study found that only about half of the companies in the S&P 500 had any clawback provisions, and only a fraction of those – fewer than 50 – give boards discretion to strip an executive of excess pay if it believed misconduct was committed. Expanding the grounds for clawbacks could protect shareholders and the public from employees at any level willing to cut corners to protect their jobs or gain a rise in pay.

american automakers  automotive industry  corruption  General Motors  negligence 

comments powered by Disqus