Monday, May 19, 2014

GM Part 2

In our April 16, 2014 post we discussed the evolving situation at General Motors regarding the issues with the Chevy Cobalt’s ignition switches.  We highlighted the difficulties GM was encountering in piecing together how decisions were made regarding re-design and possible vehicle recalls, and who in the management chain was involved and/or aware of the issues.  As we noted, GM had initiated an internal investigation of the matter with the results expected by late May.

In a recent Wall Street Journal article* there is some further perspective on how things are moving forward.  For one, the GM Board has now instituted its own investigation of how information flowed to the Board and how it affected its oversight function.  An outside law firm is conducting that investigation.

Perhaps of more interest are some comments in the article regarding the separate investigation being conducted on behalf of GM’s management.  It is being conducted by a former U.S. attorney, Anton Valukas, who also happens to be Chairman of the law firm Jenner & Block.  The WSJ article notes “some governance experts have questioned whether Mr. Valukas has enough of an arm's-length relationship with GM management. Jenner & Block has long advised GM management.”  It does seem to raise a basic conflict of interest issue, providing legal services to GM and conducting an independent investigation.  But a source quoted in the WSJ article notes that GM does not see a problem since “Mr. Valukas' own integrity is on the line…”

In terms of the specific situation it seems fairly clear to us that Valukas should not be performing the investigation on behalf of management.  The Board of Directors should have initiated the primary investigation using an independent outside firm - essentially what it has now done but which is limited to the narrow issue of information flow to the Board.  Having current management sponsor an investigation of itself using a firm with commercial ties to GM will not result in high confidence in its findings.

In a broader sense this situation models the contours of a wider problem associated with ensuring safety in complex organizational systems.  In the GM case the assurance of a completely objective and thorough investigation seems to come down to the personal integrity of Mr. Valukas.  While we have no reason to doubt his credentials or integrity, he is being placed in a situation where an aggressive investigation could have negative impacts on GM and its management - who are clients of Mr. Valukas’ law firm.  In addition this investigation will involve products liability issues which inevitably involve GM’s internal lawyers; in all probability Valukas’ firm has professional relationships with these lawyers making it a particularly sensitive situation.  It is certainly possible that Mr. Valukas will be immune to any implicit pressures due to these circumstances, but it is an approach that puts maximum reliance on the individual to do the “right” thing notwithstanding competing interests.  And in any event, the perception of an investigation of this type will always be subject to some question where conflicts are present.

We also see an interesting analogy to nuclear operations where the reliance on safety culture is in essence, reliance on personal integrity.  We are not implying there is anything wrong to expect and emphasize personal integrity, however all too often it becomes a panacea for countering significant costs or other impacts to operations and ensuring safety is accorded proper priority.  And if things go wrong, it is the norm that individuals are blamed and often, replaced.  In essence they failed the integrity test.  Why they failed, the elephant in the room, is hardly ever pursued.  Rarely if ever do corrective actions address minimizing or eliminating the influence of those conflicts, leaving the situation ripe for further failures.

*  J.S. Lublin and J. Bennett, “GM Directors Ask Why Cobalt Data Didn't Reach Them,” Wall Street Journal (May 14, 2014).

1 comment:

  1. This situation raises a question about just how many elephants there might actually be in the C-Suite and Boardroom. Given that there is a new CEO just recently having taken the helm, even though a long-time insider, it's not immediately clear that the "interest" picture isn't muddled in a Gordian Knot like manner.

    GM is a huge enterprise, and despite the involvement of fatalities which are presumed in hindsight to have been avoidable, it seems far from clear to me how accountability for a thread like this one works on the scale of operations overseen by executive management or of their actions by the Board.

    It seems to me that these risk management in large corporation cases take on meaning on several different levels only one of which is statistically measurable.

    As for the conflict of interest issue, it seems that when you have two very high level investigations going on then the CEO may be forgiven for relying upon a know quantity to advise regarding the collective significance of the events and their subsequent fallout impact on the entire corporation. Considering some of the so-called "independent" assessment reports I've read, I'd think twice about bringing in some group that didn't know my firm and didn't know my business.

    The recent WIPP Review by EM is an example that can make points on both sides of this debate I suppose. The BP Independent Review (Baker et. al.) done after Texas City is an example of this kind of exercise - can anyone say with confidence that it justified its expense in terms of the net benefits gained. Surely in light of Deepwater Horizon it is easy to imagine it might have done more good.

    But until you've had to implement one of these laundry lists developed by experts I'd say this - never conduct a high-level review that you've not already thought through the end play of before you launch it. That is not the same as dictating the conclusions, but the chartering official has lots of control over which dark corners get looked into when. In the midst of a major crisis putting a lot of exceptional demand on senior management, some prudent triage is in order - it's not fraudulent as some might protest.


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